Thursday, December 12, 2013

MMT and MMR

Randall Wray talks about how MMR broke away from MMT because of policy difference -- particularly around the job guarantee. Neither of them phrase it in exactly that way of course.

But Cullen gradually realized that MMT is not just a description of "how government really spends" but also leads to a range of policy options. And he did not like what he saw. MMT quite naturally supports progressive policy...
...he tried mightily to separate MMT from the Job Guarantee. To no avail -- it is the JG buffer stock that logically provides the anchor to sovereign current so that we can run continuous full employment without setting off inflation

There certainly is something of the spurned lover in MMR's (over) reactions to MMT, but both MMR and Wray are now asserting that the JG cannot be separated from MMT as the former flows logically from the latter. Moreover, Wray asserts that MMT is inherently progressive. Let me suggest alternatives to both of these positions:

Firstly, if you accept the idea that fiat currency comes first and foremost from the Sovereignty of the issuer, that is, the money is backed by men with guns who can tax, then it is natural that a responsible Sovereign uses that power wisely and prints (and unprints) the correct quantity. The notion of a responsible sovereign is no monopoly of the Left or the Right, although one may divine a political leaning in exactly how the printing and unprinting happens.

The idea that the primary function of the Sovereign is to print or unprint the correct amount of fiat money, and having management and oversight across horizontal money creation via the banking system, is not clearly a Left wing position either as strong central authority combined with robust oversight of semi-private entities has plenty of Right wing examples as well.

And finally, asserting a job guarantee flows "logically" from MMT is an academic assertion colored by politics. It may seem like a good idea from certain theoretical perspectives but practical realities around how it would work in real life -- cultural norms, political realities, institutional structures, etc. -- means that while it may be perfectly benign in intent, it may be harmful in reality. Good thing there are many other policies inspired by MMT insights which flow just as logically, such as tax holidays, that we can practically implement anyway.

I have no beef with MMT or MMR. I would note that given how marginal both ideas are right now they would do better to work together than to be at odds.

But
Cullen gradually realized that MMT is not just a description of “how
government really spends”, but also leads to a range of policy options.
And he did not like what he saw. MMT quite naturally supports
progressive policy. Freed of “budget constraints” and the myths of
“Uncle Sam is running out of money”, we can get on with using government
to serve the public purpose.
Cullen hated that conclusion. Above all, he hates the idea of full
employment, once remarking that unemployment works for him (presumably
he meant that unemployment of others works for him). Hence, he
tried mightily to separate MMT from the Job Guarantee. To no avail—it is
the JG buffer stock that logically provides the anchor to sovereign
currency so that we can run continuous full employment without setting
off inflation.
- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

But
Cullen gradually realized that MMT is not just a description of “how
government really spends”, but also leads to a range of policy options.
And he did not like what he saw. MMT quite naturally supports
progressive policy. Freed of “budget constraints” and the myths of
“Uncle Sam is running out of money”, we can get on with using government
to serve the public purpose.
Cullen hated that conclusion. Above all, he hates the idea of full
employment, once remarking that unemployment works for him (presumably
he meant that unemployment of others works for him). Hence, he
tried mightily to separate MMT from the Job Guarantee. To no avail—it is
the JG buffer stock that logically provides the anchor to sovereign
currency so that we can run continuous full employment without setting
off inflation.
- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

But
Cullen gradually realized that MMT is not just a description of “how
government really spends”, but also leads to a range of policy options.
And he did not like what he saw. MMT quite naturally supports
progressive policy. Freed of “budget constraints” and the myths of
“Uncle Sam is running out of money”, we can get on with using government
to serve the public purpose.
Cullen hated that conclusion. Above all, he hates the idea of full
employment, once remarking that unemployment works for him (presumably
he meant that unemployment of others works for him). Hence, he
tried mightily to separate MMT from the Job Guarantee. To no avail—it is
the JG buffer stock that logically provides the anchor to sovereign
currency so that we can run continuous full employment without setting
off inflation.
- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

currency issuer must remain monetarily autonomous.

Yep, pretty good. Cullen got it right: gove

- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

But
Cullen gradually realized that MMT is not just a description of “how
government really spends”, but also leads to a range of policy options.
And he did not like what he saw. MMT quite naturally supports
progressive policy. Freed of “budget constraints” and the myths of
“Uncle Sam is running out of money”, we can get on with using government
to serve the public purpose.
Cullen hated that conclusion. Above all, he hates the idea of full
employment, once remarking that unemployment works for him (presumably
he meant that unemployment of others works for him). Hence, he
tried mightily to separate MMT from the Job Guarantee. To no avail—it is
the JG buffer stock that logically provides the anchor to sovereign
currency so that we can run continuous full employment without setting
off inflation.
- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

But
Cullen gradually realized that MMT is not just a description of “how
government really spends”, but also leads to a range of policy options.
And he did not like what he saw. MMT quite naturally supports
progressive policy. Freed of “budget constraints” and the myths of
“Uncle Sam is running out of money”, we can get on with using government
to serve the public purpose.
Cullen hated that conclusion. Above all, he hates the idea of full
employment, once remarking that unemployment works for him (presumably
he meant that unemployment of others works for him). Hence, he
tried mightily to separate MMT from the Job Guarantee. To no avail—it is
the JG buffer stock that logically provides the anchor to sovereign
currency so that we can run continuous full employment without setting
off inflation.
- See more at: http://www.economonitor.com/lrwray/2013/12/11/mmt-often-imitated-never-duplicated/#sthash.NzgHFsDU.dpuf

123 Comments:

You're getting closer. I went through this same process of understanding some of MMT's core principles a few years back and that's what led to the "break-up". Although, I will add that, in retrospect, I had never fully adopted MMT's views and in fact had rejected some core tenets all along (like the JG, the money monopolist concept, parts of the state theory, etc). I wrongly labelled myself and some of my work "MMT" before I realized the flaws. That was a big mistake and I look stupid for doing it. Oh well. My line of work is about making mistakes and learning from them so that's what I've tried to do with MR.....

Anyhow, the part you're missing is that MMT explicitly states that unemployment is the result of a lack of govt spending. Mosler says: "Unemployment equates to the Federal budget deficit being too small". So, MMT says that the currency monopolist hasn't provided enough currency to allow for full employment and the private sector to "net save" therefore, they have the responsibility to hire the unemployed because they caused the unemployment. This is what Mosler refers to as the MMT "base case". Therefore, it DOES logically flow from this that the JG and MMT are intertwined. To reject this concept is to reject MMT's "base case" and the idea that unemployment is the result of the deficit being too small because the currency monopolist didn't provide enough NFA to net save.

I think this concept is flat out wrong. I've described it a million times in comments at PC and JKH has written the beautiful paper on S=I+(S-I), which makes the same basic point, but MMTers totally fail to understand it. They just literally don't understand it or don't want to understand it.

The reality is that involuntary unemployment is caused by the fact that capitalists will always maintain a buffer of unemployed because it doesn't make sense for them to maintain full employment at all times. A capitalist system has a natural "base case" of SOME level of unemployment at all times because it is not prudent or profitable to always maintain full employment. The govt could run a gazillion dollar deficit and capitalists still won't maintain zero involuntary unemployment. It just won't happen because the govt can't force capitalists to hire everyone. They'll just save more for themselves. So MMT just has this whole point wrong. In other words, MMT's "base case" and most important point, is factually wrong.

MMT sometimes uses an example of 100 dogs and 95 bones to make this point about not enough govt spending. But that's just misleading. There are plenty of "bones" in the US economy. They just aren't very evenly distributed and there aren't jobs for everyone because capitalists like to hang onto their bones. They are, after all, profit hoarders, by nature....

So, yes, I think you're right that MMT's position is political. In fact, I'd argue that it's purely political and that the economists have devised an extremely misleading explanation that tries to tie their theory into full employment. So I don't think you're right that MMT and the JG can be separated.

Anyhow, my position here has never been a political one despite claims otherwise. I think the logic behind the MMT position on the "money monopolist", "net saving" and unemployment are operationally wrong and misleading. That's always been the crux of my rejection of MMT's positions.

I hope that all makes sense to you.

Take care,

Cullen

PS - It's MR as in "Monetary Realism". MMR is a disease and we only called it that for about a month 2 year ago....:-)

The path away from MMT was a combination of gradual and sudden. The MMT 'in paradigm' thought structure is a good place to start thinking about how the economy "must" work in order to follow the laws of accounting. It's probably necessary for people who learned the Chicago School monetarist way of thinking through credit and fiscal policy.

The problem with MMT is pretty simple. Once you start thinking through how the economy goes together via the accounting, you eventually come to the realization MMT is interpreting the world through a highly politicalized thought process. MMT isn't terrible, but neither is it even close to an accurate representation of what happens in the economy. It's an extremely progressive view of the economy. Their descriptions of how the fed and treasury work together is really misleading, despite being more accurate than the conventional view. I think this is the part that throws people - MMT has both a more accurate view of the fed/treasury relationship than the mainstream and a view which is highly political and misleading.

In particular, it is a very liberal view of governments role in the economy, and of how every sector should behave in relation to the government.

It is pretty important to note we are not the only group of closely related natural allies which the MMT crowd has declared arch-enemies. Ask Mark Lavoie about his paper sometime.

I won't go into the significant ideas MR (I think) has brought up - but I'd say the wider consensus out in the econ blogosphere is far more friendly to MR's core ideas than to MMTs ideas. Many people - like Yglesias, Delong, Klein, Frances Coppola, Aziz, and others, have adopted views which are far closer to MR than to MMT. It's impossible to be MMT without the JG, as Wray points out. I don't think many people are going to make the jump to supporting launching the largest U.S. government program in history.

This isn't a minor detail. Wray comes out and says you can't have MMT without the JG. Even if you are pretty liberal and progressive, the JG is still farther out there.

The only person to thread the needle on this has been Edward Harrison, and as far as I can tell, nobody in MMT world talks with Ed at all.

JKH has detailed his contingent institutional approach to thinking about the relationship between the fed and Treasury. It's an important step which recognizes the accounting links between the two institutions, while recognizing every sovereign needs to make choices - and those choices make rather large differences to the economy. Scott Fulwiler has been excellent on the descriptions as well.

Cullen says, “The reality is that involuntary unemployment is caused by the fact that capitalists will always maintain a buffer of unemployed because it doesn't make sense for them to maintain full employment at all times.”

Cullen: please explain how “capitalists” do this? Do they all meet once a year in some secret location and decide what next year’s unemployment rate will be?

I suggest that standard view of free markets and capitalism is more realistic: each firm acts in its own interest and has absolutely no view whatsoever on what the optimum level of unemployment is.

Each firm simply tries to increase it’s market share and meets whatever level of demand for its products that involves. And the higher is AD, the fewer unemployed there are, thus the lower the quality of labour available from the dole queues. And when the unemployment rate drops to 5% / 3% or whatever, unemployed labour just isn't of a quality that’s of any use to employers. That’s why employers raise prices rather than increase hirings when unemployment is down to 5%, 4%, 3% or whatever.

If you’re an employer and you want a qualified plumber, and there just aren’t any qualified plumbers amongst the local unemployed, what do you do? You tell me.

But if it’s possible to increase employment simply by net spending more, then that’s the way to raise employment, rather than via JG. I.e. regular jobs (public and private sector) are better than the “make work” jobs (to be a bit pejorative) involved in JG.

Moreover, if government cares so little for the unemployed that it can’t be bothered net spending enough, then it’s unlikely to go to all the fuss and bother and implementing JG (which is bureaucratically far more difficult and expensive than simply printing dollars and spending them).

I’m baffled. Plus I distinctly remember Warren saying once that he thought the monetary and JG aspects of MMT were essentially separate.

Speaking from a mechanical standpoint, my take-a-way, from almost every paper or post on both MMT and MR, is that all the dots are not being connected. Just to mention a few of what I see as gaps, currency and reserves are not tied to money creation (both must come from government or banks at initiation), ownership is not treated as a continuum (once created, money is carefully shepherded until returned to government or bank), and value-over-time is ignored (money inherently carries value through time).

Despite these detraction's, the basic MMT and MR mechanics appeal to me because of basically correct intuitive descriptions. I think the detraction's I mentioned can be overcome; your post may be a step in that direction.

Hey Ralph. Yes, capitalists meet at the annual convention in Dallas every year. Did you not get your invitation for this year's event??? :-)

I agree with you that capitalists and firms make their decisions independently. But each firm is trying to maximize profits and is maintaining their own buffers to protect profit margins. This means, in the aggregate, that capitalists are unlikely to sustain zero involuntary unemployment because they are unlikely to balance aggregate supply and aggregate demand in a way that clears the market at full employment.

This doesn't mean deficit spending can't increase AD or even help increase employment. I have NEVER said I am against deficits and I have even stated, on many occasions, that I am in favor of trying a JG. But that's not the point I am making. My point, as you seem to agree, is that MMT's "base case" and explanation for the unemployment is just fundamentally erroneous. And once you begin to understand this point from the MR view then it becomes clear that MMT gets a whole slew of things wrong in an attempt to explain unemployment and convince people that their policy ideas are right. In other words, the operational description in MMT is inconsistent with the policy view.

And let's be clear - this isn't personal. I think parts of MMT are wrong just like I think parts of Austrian econ and Market Monetarism are wrong. That's got nothing to do with the people behind those theories. It's about understanding the operational realities of the system so we can begin to better understand the world we live in and apply the right fixes.

I am all in favor of deficits for employment, but I am vehemently against misrepresenting the system we live in order to achieve those policies. You can understand MR and still advocate for a JG and deficits. But I don't think we should support erroneous explanations of the system and we certainly shouldn't support the sort of petulant behavior in Randy's post. None of that is conducive to learning and mutual understanding.

Cullen misunderstands the 95 dogs, 100 bones meme. As I understand, it refers to*jobs* not the supply of money. It's a targeted response to claims that involuntary unemployment is the result of laziness, and is an attempt to shift focus away from the psychology of the worker to macro conditions and how jobs are created. The fact Cullen talks about "capitalists holding onto their bones" suggests he doesn't understand it because the "bones" of the metaphor are jobs, not money. Perhaps his interpretation is right, but i'd like to see some citations to that effect, because it looks to me like he's just misunderstood what they are saying.

Also, there is a lot of misunderstanding regarding the MMT position regarding the relationship between the government, unemployment and the budget deficit. As I have heard it presented by MMTers, unemployment is a result of the fact we live in a monetary production economy structured around state laws of property, contract, tax, etc. Since involuntary unemployment wouldn't exist in a non-monetary production economy (i.e. hunter-gatherer tribe), and can be alleviated through appropriate spending programs (i.e. ones that include a targeted JG), one can draw a causal relationship between persistent unemployment and insufficient government spending. But the causal link is more like that of an antidote to a pathogen - the budget deficit isn't the core problem, just a solution to the core problem, which is that our social structure forces people into the labor market and doesn't guarantee the labor market clears.

Cullen is right when he says that "unemployment is a natural feature of [pure] capitalism!" and that government could spend a gazillion dollars and not eliminate unemployment if it didn't implement a JG. But this isn't a novel insight - indeed, MMTers have made this point over and over when they distinguish pump-priming from their preferred spending policies that include a JG. (nb: Ralph is undoubtedly aware of this literature but is curiously ignoring in his comment). Moreover, it's not a very useful critique - it's like saying "if a vaccine is defective or only temporarily effective, the state could print a trillion units and not eliminate the virus". Well, duh. That's why the JG is such a critical part of the MMT narrative - without a legally enforceable right to a job, and a (dare i say it) appropriate transmission mechanism, how can one claim to have addressed the problem of involuntary unemployment?

i imagine there are a few answers one could give to that question:

1. One could deny that involuntary unemployment is a problem that needs to be addressed (i.e. social darwinists and/or those who think unemployment insurance sufficiently meets the state's social responsibility)2. One could agree that involuntary unemployment is a problem, but think it isn't the state's responsibility to fix through macro interventions (i.e. libertarians), or that even if it wanted to it couldn't (i.e. cynical politicos)3. One could agree that involuntary unemployment is a problem for the state to address, but think that it can be addressed by non-JG spending (i.e. pump-primers) or other programs (i.e. UBI, Morgan Warstler's BI/CYB, elimination of minimum wage laws).4. One could agree involuntary unemployment is a problem for the state to address, and be skeptical about pump-priming and the JG, but not have a better alternative (i.e. the lost agnostics)

While JG as a policy recommendation may flow logically from MMT, that doesn't make MMT wrong nor does it make JG a good policy idea. Free Trade flows logically the same way from Comparative Advantage. The Platinum Coin flows logically from the legal parameters of the Mint. Etc. Theory is narrow and simplified, the real world is broad and complicated, and Academics are known for impracticality for a reason. I don't hold it against them, and I don't crucify them for it either.

Certainly no one from the MMT camp has said the only way you can apply the theory is through JG, there are other policy recommendations as well, so let us accept the two can be divided practically just as they have shown it can be so.

I also think there's also a great discussion to be had here about what causes unemployment, so thank you for that prompt.

Michael: MR certainly wins popularity contests vs MMT, which is interesting in and of itself, but I haven't seen it actually win converts. The folks you mention may have mentioned an MR/MMT idea, but fundamentally they still think as they did before. If you can show me any Road to Damascus moments though I would be much obliged.

And unless there are non-Chicago Monetarist schools I don't know about, let's not get personal.

That's because you all misunderstand it by adopting an inappropriate viewpoint.

It is a simplification of the entire theory that can be expressed in a soundbite. Warren is good at soundbites, but obviously they can be misinterpreted if you hold different assumptions

Let me expand it for you:

The starting point is usually the non-government sector - which desires to hold more financial savings than it invests. This is at the point where you have done as much as is sensible to encourage investment and discourage hoarding (the natural rate of interest is zero), and you have limited the banks to the public purpose (lending for capital development purposes only).

But you will still have involuntary unemployment at this point. That is a natural consequence of endogenous money - which will not match desired savings and investment by magic.

Going much further with manipulating investment or savings *will likely lead to misallocation*, so to accommodate those excess saving you have to run a government deficit and cut taxes to do so (Payroll taxes first and foremost). That gets more spending into the system and uses up some more unemployment.

You can do that up to the point where you get labour market supply side tightness in the private sector. So you set the general tax point that will bring a private sector expansion to a halt well before you get pull inflation in the labour market.

But even then you will have some remaining involuntary unemployment - because the private sector hiring profile is always the wrong shape to perfectly fit the supply in the labour market.

The approach MMT then takes is to leave the private sector in the shape that it is, and give some money to the remaining unemployed so they can live a life free of poverty. And then it gets them to do something for that money in the form of a transition job. That then makes them a slightly better hiring prospect.

The result of that extra money is more demand in the private sector and a further increase in private employment. Taxes are then fine-tuned further to reduce the transition job pool down so it is at its minimum level at the maximum permitted expansion of the private sector.

The result is full employment and the elimination of poverty via an enhanced auto-stabiliser system, with maximum capital development and productivity. It is for capital to bridge the gap to labour via training and investment in search of profit.

MMT essentially makes the labour market fit the hiring shape of the private sector, and the transition pool is the plasticine bit that moulds the two halves together.

So when Warren says that unemployment is a result of the budget deficit being too small, that is at the point that you can do nothing further with the excess savings within the private system and you have to accommodate them. The budget deficit then has to be injected primarily via tax cuts, but also as a gift of money to the remaining unemployed that nobody wants to hire - but might do if they see them working. The labour market is then clear.

Rohan, I understand the bones/dogs metaphor perfectly well. Perhaps I didn't explain it as clearly as some other people do. It's a silly metaphor anyhow and really has nothing to do with the broader point I am making....The fact is, Warren and MMT clearly state: "Unemployment equates to the Federal budget deficit being too small". This point is factually incorrect. Unemployment is not caused by the currency monopolist not providing enough NFA to allow for the pvt sector to net save. That is simply an erroneous construct and it is a crucial misunderstanding that renders much of MMT flawed.

You prove that you don't fully understand MMT when you say "the budget deficit isn't the core problem". That comment contradicts what the founder of MMT clearly states. So you're very obviously the one who "doesnt' understand" the MMT position here and you clearly haven't read enough of the literature here to understand it fully yet you consistently go around lecturing other people and declaring that they "don't understand".

I would kindly suggest you read more of the MMT literature before you declare that no one else understands this stuff. Oh, and thanks for your general fairness in discussing these things. I've always found you to be fair and nice.

Neil, the MMT construct of "net saving" as (S-I) is fundamentally wrong and misleading. This point has been explained by dozens of people yet you continually fail to understand the point. I saw your comments over at Wray's petulant post where you proved you still don't understand the point of our use of the equation. If you don't get it by now then you just don't get it. I don't know what to say. It's been explained 100 times to you by Ramanan, JKH, Brett, and other people. I've had literally hundreds of people express their thanks for the equation and its insight. MMTers seem to be the only people who can't get it. I don't know why. Maybe the whole obsession with NFA and S-I has clouded the mind. I don't know.

Also, your comment over that about "Watching an ideology desperately trying to avoid giving money to people they don't really like is mildly amusing to watch, but shouldn't distract from the issues at hand" is just a blatant misrepresentation. We have never said we don't want to use govt to give money to people. In fact, if you were remotely familiar with my personal positions you'd know that I've been in favor of trying a JG and I have been a huge supporter of the budget deficits in recent years.

You guys continually try to peg us as "conservatives" and "neocons" because your arguments are too weak to actually combat us on the facts. So it's easier to just try to peg us as ideologues. It's not working for you because you're obviously just misleading people.

I'm not sure how you are interpreting the dogs/bones metaphor - are you challenging the premise that there can be macro conditions under which there are 100 job seekers for 95 available job openings? I know there are people who believe the answer lies in skills mismatches, or who blame minimum wage laws for a failure of labor market clearing, but i haven't heard you make those arguments (maybe i've missed them). If you do agree with them, then fair enough. If not, and if you do understand the dogs/bones metaphor correctly in that it refers to job availability not money, what is your beef with it?

As to your other point, I don't think you understood what I was saying. You are making a non-sequitur in your thinking when you equivocate Mosler's claim that

"Unemployment equates to the Federal budget deficit being too small"

With the idea that

"Unemployment is caused by the currency monopolist not providing enough NFA to allow for the pvt sector to net save"

The former is describing an equivalence, the latter is describing a narrow causal relationship. Contrast, for example, the claim that:

"The persistence of smallpox equates to the production of vaccine being to small"

with

"Smallpox is caused by insufficient production of smallpox vaccine"

See the difference?

Take, for example, the basic business card example Mosler uses regularly - it's not an initial desire to net save in fiat currency that causes unemployment, it's the use of legal coercion to bring people involuntarily into the labor market for business cards that causes unemployment.

I'm glad you find me fair and nice, although given you blocked me from your website for alleged uncivility, i'm a little surprised by the response.

"Involuntary unemployment is evidence that the desired H(nfa) of the private sector exceeds the actual H(nfa) allowed by government fiscal policy.

To be blunt, involuntary unemployment exists because the federal budget deficit is too small."

Again, that comment explicitly contradicts the point you're trying to make. You just don't have this right.

Also, I didn't ban you from my site. But I do moderate all known MMT commenters as they have a tendency to leave petulant comments that grossly resemble the tone and language in Wray's post. Unfortunately, the internet is filled with some mean people and MMT has developed a reputation for demeaning other people. Sadly, you fall under the umbrella of guilty by association. Doesn't mean I don't think you're a good dude though.

How does that quote contradict the point i'm making? Again, to use my analogy:

"The persistence of smallpox is evidence that the amount of vaccine desired exceeds the actual amount of vaccine produced by the government.

To be blunt, smallpox exists because the level of production of vaccine is too small."

You are starting halfway through Mosler's story and as a result, missing the forest for the trees. Start where he does in the business card analogy, in a world without government taxes or a state-enforced monetary-legal system. As he says, there is no involuntary unemployment in that scenario because people are not required to participate in the labor market.

And for the historical record, you blocked my email address after an extended conversation (see here: http://pragcap.com/post-keynesian-is-not-necessarily-modern-monetary-theory-mmt), saying ""I’ve censored your very personal comments like the one where you just called me a middle schooler [In fact, I said that a point of legal analysis you made was of middle school quality]. I’ve decided to cut you off permanently after several warnings. Sorry, but you just can’t engage me maturely no matter how many times I ask so like a proper authoritarian I am going to put you in PragCap timeout." Earlier in the conversation you also called me a "simple internet troll", and "someone who will distort the truth as long as it helps you defend your ideology." So i'm glad we've moved beyond that.

Rohan, you're changing the point. You can't define what "unemployment" is in a non-monetary society and you likely need to alter the definition of "money" before you can even begin to have such a conversation.

Also, "Pragcap Timeout" is my term for "comment moderation". Anyhow, the list of people in "Pragcap timeout" is extremely small, and unfortunately, seems to be filled with Austrian econ commenters and MMTers. Both groups seem to have a tendency to get very personal in their comments resulting in the need for comment moderation. If you guys want to avoid that sort of thing in the future you might just try to be nicer to people. Maybe stop calling economists "idiots", "retarded" and things like that. Just a thought.

I doubt this conversation has much left in the tank so have a good weekend and take care. Happy holidays everyone. And thanks for hosting WS!

The entire argument is that the phenomenon of unemployment as we understand it today is a property of our current type of monetary production economy/capitalist legal system. I'm not changing the point at all, we're just finally getting on the same page. And Robert Hale made the point very well about how legal rules coerce people to enter the labor market:

http://www.houseofrussell.com/legalhistory/alh/docs/hale.html

Also, I never called you an idiot or retarded, Cullen, and it's obviously your blog so you're entitled to moderate as you see fit. I'm just glad to hear we are beyond that point.

Rohan, Well, the "entire phenomenon of unemployment as we understand it today" is quite different in MMT than it is in the rest of mainstream economics. MMT changes the definition of "unemployment" to mean "zero involuntary unemployment". That's not common practice in mainstream economics. Now, I understand what you guys mean when you refer to "unemployment", but a lot of economists don't because they don't use the same definition. So, you can see how this stuff gets kind of muddled before it even begins.

Anyhow, I didn't mean to imply that you called anyone names. That was directed at some other MMT founders and writers who seem to go out of their way at times to write extremely petulant and personal blog posts that insult people and contribute little relevant content. And yes, I hope you and I are beyond the point of sniping at one another. My intent with these discussions is not to attack people, but to come to a better understanding of ideas and how things work. I am totally cool with the potential of a JG and massive govt intervention in the economy if it's based on sound understandings and sound principles, but I don't think MMT always does that. I really just want to get the principles right. That's always been my main priority despite the fact that many people have tried to peg me as a "neocon" or "conservative" in what really amounts to nothing more than a really lame attempt to discredit me.

Neil, X=X+1 has nothing to do with the point we were making. Phillippe at Wray's site seems to understand our point better than you do. You just clearly don't get what we're saying. Maybe read JKH's paper a few times?

Also, I never changed my position on this. I NEVER said I was against the JG or deficit spending. You just never took the time to undertand my position before you decided to conclude that everyone who disagrees with MMT must be some sort of unreasonable heartless fool. Did you ever consider that maybe, just maybe, it is MMT that misunderstands some points?

Anyhow, I can see you're trying to strawman me again so I'll just let you guys have at it. Please feel free to call me all sorts of names, misconstrue what I've actually stated in the past and do whatever you need to do to make the MMT policy agenda sound more plausible.

Are you really blaming MMT for the fact that mainstream economics has twisted the words "full employment" to include the NAIRU? Plus, their definition is not idiosyncratic within the broader history of economics, as Bill Mitchell points out, it is identical to the definition developed by William Beveridge: http://bilbo.economicoutlook.net/blog/?p=17587.

Neil, no, that's not the point we are making. I am pretty sure we can "see" the point we're making considering that we created the point being made. You just accused me of being an ideologue who hates govt intervention in the economy so you have a clear track record of having no idea what I "see" or don't see. I suggest you stop pretending that you can see the world on behalf of other people's eyes - eyes you have never seen yourself and have never taken the time to even try to understand.

Rohan,

I am just pointing out that the definition of "unemployment" has been vague and inconsistent for a long time. I get the MMT point that the imposition of a fiat money could potentially be the cause of some unemployment. But I am saying, that in a capitalist system, that's not the real cause. The real cause is that the capitalists don't properly distribute the money and that they don't maintain the sort of distribution that would meet full employment at all times. That's the real cause of unemployment. It has nothing to do with not enough NFA and the explanation Mosler puts forward. The real cause of unemployment in a capitalist system is the fact that capitalists are greedy profit hoarders.

There's a reasonable explanation for something like a JG based on this understanding. You simply point out that we live in a monetary economy where everyone needs a job to survive, but that the capitalists won't sustain full employment at all times on their own. This is a moral argument that most people will have some sympathy for. It's kind of a no-brainer if you understand it. But when you create this faulty sounding story around not enough NFA or something like that then I think you start stretching reality and creating a myth about how things actually work....Especially when you start changing the definition of "net saving" and tying in some of the more misleading MMT points.

Not even $17T. Most of the NFA issued by the govt is held by the govt itself or foreigners. Something like $5T is held by the domestic public. And bear in mind, private sector net worth is almost $110T....We're talking about 4-5% of the total balance sheet here....Not exactly a world changing component....

I think both MMT and MMR would agree:1) the govt spends first, then taxes back the money.2) spending equals income.Under the current fiat monetary arrangement, the govt must spend to enable the private sector to have money. If the govt MUST spend, the govt MUST hire workers (BIG has been discussed elsewhere and I agree with Wray - giving everyone money for nothing (and chicks for free) would be extremely inflationary). To remove any political ideology the number of workers the govt MUST hire needs to be set somewhere. MMT says that somewhere should be full employment. Cullen misses the boat on this.

I think MMTers "miss the boat" on what MR even is (including its name). You just described the MMT position. All MR does is describe the current operational realities within the actual institutional designs in place.

This is all described within my paper on the monetary system and JKH's Contingent Institutional Approach. We most definitely do not describe the system as one where the govt spends first and taxes back the money.

It's also categorically false to claim that "the govt must spend" to allow the pvt sector to have money. I can go to the bank today and get a loan and money without any govt involvement. I also don't need the govt involved in the economy to increase my net worth or my financial assets. The private sector can achieve this entirely on its own. But MMT takes a 4% slice of pvt sector net worth, redefines it as "net saving" and then constructs an entire world view around it as though we couldn't survive without it. It's terribly misleading once you understand the MR view of things.

I am actually not even opposed to a JG and deficit spending. What I am opposed to is explaining the monetary system in a way that it totally misleading.

Cullen,Reading my post carefully, you will note I said "Under the current fiat monetary arrangement". If you were to start a monetary system with no money, how would it start? Explain in the context of our fiat money system how the bank would make that loan to you if the system had no money. Please include bank capital and reserve requirements in your explanation and keep everything in the context of our current monetary arrangement. In other words, money is not backed by gold, real estate, salt, Elvis memorabilia, etc. Thank you.

It's rather simple. Let's say you and I exist in a system where the medium of exchange is CR Bucks. And let's say that no CR Bucks presently exist, but we agree that the CR bank is the only means of issuing and using CR bucks. Then let's say that Mark has a house that he believes is worth 100 of these CR bucks. So you come to me and I issue you 100 CR bucks and you use your house as collateral. I issue you 100 CR bucks and you have an asset in the CR bucks and a liability in the loan. I have the asset in the loaned CR bucks and a liability in the deposit you now have within my CR payments system. Wahlah! We've created money.

Adding a govt into this and a Reserve system is all rather system. We could even agree that CR bucks will be called US Dollars now and that a certain percentage of these US Dollars will be taxed and used for public purpose. We could also use a "central bank" to help settle payments as our CR bucks system grows into many different entities issuing CR bucks (now dollars) and is need of a central clearinghouse.

This is actually a vastly oversimplified story behind how our monetary system came to be.

I think you're assuming that the govt had to issue US dollars before any bank could ever make a loan or before anyone could ever have money. That's not necessarily true. The US govt has deemed the US Dollar as the unit of account, but has effectively outsourced the creation of those dollars to the banks. The concept of "govt creating money" is highly misleading in a system such as ours. The govt really just creates NFA as t-bonds. Most of the power of money creation rests with the banks.

Cullen said: "but we agree that the CR bank is the only means of issuing and using CR bucks". That is not in the context of our present system. Bank issued money not backed by anything has been tried and failed. Sorry, you are creating your own system; not the one we live in. Wray says anyone can create money, the trick is getting it accepted. I default on the loan. (In CR Land) I own 37 assault riffles and 200 thousand rounds of ammo. Good luck collecting your collateral. Think CR bucks will be accepted?Nice try, but govt spending followed by a tax enforcement is required to make a purely fiat money system work.Cullen also said "This is actually a vastly oversimplified story behind how our monetary system came to be." Yep, it evolved from a bunch of failed systems (like the one in your story).

You asked me to create a hypothetical so I did. And then you rejected it because it wasn't in-line with your chicken and egg hypothetical where the govt somehow spends first before any of us even have money. Sorry, but that's an equally misleading presentation. The govt does not have to spend money in order for the non-government to have money.

Anyhow, you don't seem very open-minded to anything other than the MMT views and I generally know how this conversation ends with people who refuse to even consider that MMT might be wrong so I'll just call it quits here.

Thanks for listening even though we didn't agree. Have a nice weekend.

Mark, I think you would agree that loans create deposits, and that banks aren't reserve constrained. Therefore, banks can create money out of thin air. Why do you say that the govt needs to spend money first when the banks can do it out of thin air?

We already know an idealised private circuit can clear all on its own. Again this is something Steve Keen has been doing for years and he has the dynamic models to show how private debt expansion crashes and burns the system on a regular basis.

Here's my update to the model which corrected the accounting and added the 'credit licences' that actually give the permission to the commercial banks to create the state unit of account.

Endogenous money and all of these ideas existed long before Steve Keen. And no, the private circuit is not naturally unstable. MMT founders have stated this explicitly. Plus, this stuff about "horizontal" money is just an abuse of well known terminology that misconstrues words used long before MMT came along and changed definitions. And lastly, this idea of credit licenses is entirely misleading. States in the USA issue licenses. Does that mean states are suddenly pari passu with the federal government as "currency issuers"? There are so many contradictions and tortured points in all of this that I am stunned by how many smart people continue to defend it. There is literally not one thing that a smart Post-Keynesian needs to understand from MMT that can't be explained without all the "new paradigm" nonsense. Literally, not one thing. The only reason you seem to defend it is because of the political appeal and even the logic underpinning that is demonstrably false.

I just don't see the point of all these changes in terminology, new definitions, tortured descriptions and misleading operational descriptions. What is the point?

Private money creation without govt enforcement has been tried and failed miserably. Cullen, please give me one success story (not CR land fairytale) if I am wrong. And Geof, reserve constrained and reserve required are two different things.

That's not a very fair line of reasoning. I could also say that fiat currencies always fail over the course of history, but that doesn't really mean much.

I agree that private money creation should be regulated. I also agree with the idea of having a central bank maintaining a central clearinghouse and serving as a regulator. These are positive developments in modern banking. But make no mistake - if you think the govt controls the money supply or controls money via MMT's alternative version of the money multiplier (whether it be via this concept of "leveraging" or "license issuance") then you're probably misunderstanding the modern monetary system.

Anyhow, we seem to have gotten off the point here regarding the flaw in MMT's "base case" and "most important" policy idea. The fact is, the reasoning behind MMT's "base case" if demonstrably flawed and once you realize it you begin to see many different flaws in the theory.

More importantly, once you begin to see these flaws you realize that the whole "new paradigm" thing is a distraction. A smart Post-Keynesian can be in favor of JGs, deficit spending, understand endogenous money, understand the "currency issuer" concept and literally everything in MMT without having to create this tortured version of the monetary system where the govt "doesn't have money". There's literally no need for all of this and it doesn't help push the Post-Keynesian story forward. MMT's economists have made some interesting contributions and I encourage people to learn MMT, but as a description of the monetary system I do think it's distracting people with some of its points....

Cullen,First, I am no MMT expert. I do not agree with all the policy recommendations of MMT. I do not think the govt controls the money supply. But I do believe govt (treasury and central bank) is an integral part of making the fiat money system work. Look at the major currencies. Of the Dollar (US and AUS), Yen, Pound, and Euro, which is failing? Of those same currencies, which has no fiscal authority?

States can issue bank licenses because doing so is not preempted by federal powers - if it was, it would be illegal. Indeed, in the recent Watters v Wachovia case, the Supreme Court held that federal banking regulations preempted state regulations concerned a state-chartered bank subsidiary of a federal bank, so I don't know why you think pointing out state licenses somehow undermines the chartalist position.

Moreover, even if your concern is valid, it's a bait and switch tactic to argue that a division of federalist powers somehow invalidates a state theory of money. A federal government could enact all sorts of fiat-issue-sharing arrangements with state and local governments without being inconsistent with chartalism.

The point Neil is making about licenses, as Nathan Tankus and I tried to explain to you once before on Twitter, is that bank credit creation privileges are *legal* in nature, which means they necessarily involve state institutions (i.e. Courts). So start your story with banking institutions rather than the state ignores the courts that make those institutions "banks" rather than just "you and i".

If you want to make your point more coherent, you should ignore banks and develop a story based in interpersonal IOU/credit arrangements, because in the absence of special legal recognition, "bankers" are just regular people, in which case your story doesn't explain why their IOUs are much more readily accepted.

We've had this discussion in the past and you don't seem to understand the irrelevance of the point you're making as it pertains to MMT. It's pretty obvious that govt's regulate lots of things. That doesn't mean the govt is the monopolist of all of these things or that we automatically reside in some sort of statist regime where no one has any independent powers outside of the govt. For instance, the federal govt and state govt's regulate who can and cannot distribute financial advice in the USA. This doesn't mean the govt is the "financial advisory monopolist". And the issuance of bank charters certainly doesn't mean banks "leverage" HPM or anything resembling this.

MMT has created its own (slightly more sophisticated) version of the money multiplier through all of this by attempting to claim that banks are just issuing claims on HPM. Sorry, but it's totally misleading and it gets the orders of power in money issuance totally backwards.

There's really nothing interesting about the ideas that govts issue bank charters other than to point out the obvious fact that the govt regulates banking. And to try to attach this to HPM or a "leveraging" or HPM is a tortured version of the monetary system that adds no value at all to the discussion and in fact misleads more than it contributes.

If you want to say that the govt establishes the unit of account and regulates the banks then great. But all this "new paradigm" stuff that MMT adds on to try to create a direct relationshop between govt money issuance and bank money issuance is an unnecessary distraction.

Again, you're jumping between ideas. The government is not the financial advisory monopolist - I would never say it is. But it is the financial advisory *license* monopolist. So plenty of people can give financial advice. But they cannot engage in financial advice-related activities that require a legal license unless they conform to the conditions established by law or accept sanctions.

Similarly, banks engage in special behavior that other entities aren't allowed to engage in (i.e. power to create deposits that are guaranteed convertible at par to currency, access to the discount window/reserve system) by virtue of their license. It's not just a matter of them being "regulated" - they exist as a legally-created class of institutions. That's why they have a special relationship to HPM that you or I don't have.

Well, it becomes relevant when you attempt to critique the MMT line that money is a public monopoly by pointing out that private banks create deposits, without acknowledging and addressing the fact that the State has a monopoly over who can call themselves a bank.

As far as I can tell, your only substantive response has been the point about state charters. But state governments aren't "private sector entities", so at best all you seem to be pointing out is that the money monopoly is subject to competing institutional claims within the public sector. I doubt MMTers would disagree with that - indeed, that's a quite obvious observation, and also applies to the Fed-Tsy consolidation debate.

I think the govt could be described as having a monopoly over licensed financial advice, just as it could be described as having a monopoly over other licensed activities, by virtue of its monopoly over the legal institutions that govern those licenses.

I've pointed before to the work of legal scholars like Christine Desan (i.e. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321313) that accord with the MMT analysis, but you seem resistant to addressing them. Perhaps that's more Carlos's area than yours, but i'd be much more open to MR if it attempted to synthesize itself with current legal realist scholarship on money.

I've read that paper. I guess I just don't see the link here that you guys do. I see the banks as the primary money creators and I view them as creating that money with oligopolistic type controls. The govt definitely determines the unit of account and has monopolized the license issuance, but I don't see how that really matters that much in any realistic way. So I think the point is being overstated.

The things I have a problem with are the way MMT tries to construct a HPM centric view of the monetary system and marginalizes the role of bank money by claiming that its just a claim on currency. I just don't see it this way and I don't see a lot of value in constructing this view of the world. It is a slightly more sophisticated view of the neoclassical money multiplier model that constructs everything around HPM. You guys obviously understand endogenous money, but I don't think MMT quite ties the pieces together.

Anyhow, we disagree. Big deal. I seem to disagree with most economists on something. Hell, I am waging a IOER battle with Nick Rowe as we speak over at Pragcap. But I think this stuff is good. It's helping a lot of people come to a better understanding so let's keep the conversation going in the future.

I think you're conflating two points of analysis when you say "I see banks as primary money creators and view them as creating that money with oligopolistic type controls". I think it's quite uncontroversial that most day-to-day commercial activity in the economy involves bank deposits not cash/reserves, as it is that bankers have oligopolistic influence in our current political system. Indeed, MMTers have been quite vocal about the latter point (i.e. Bill Black's extensive writing, as well as Wray and others' discussions of connections between people like Geithner, Rubin and the banking sector). But the first observation is operational (this is how the monetary system works), and the second is political (this is where the locus of power is within society). And this is where I have problems with your claim that MR is "apolitical" - the story one chooses to use to describe political dynamics can end up influencing the dynamics themselves. So when you start your story with bank operations and go straight from there to banks' oligopolistic political power, you ignore the transmission channel by which that power is exercised, which is state institutions, i.e. laws and regulations, and as a result treat power relations as simply another operational feature of the system. By contrast, when the MMT story emphasizes the legal-architectural role of the state, as well as the hypocrisy of elected governments claiming to be democratically responsive while in fact being captured by banks, that framing reveals very important social problems and opportunities for resolving them that I think your framing ignores.

I'm also confused by the fact you claim to have read Desan's paper, but then describe the government's role in establishing money as being narrowly limited to the UoA and bank licenses. In truth, the state's role goes far deeper, including even regulating the accounting practices that JKH discusses in his papers. Desan makes this point very clearly:

Money, it turns out, depends on a set of concepts—‘credit,’ ‘debt,’ ‘commodity,’ ‘payment,’ ‘sale,’ ‘contract,’ even (or especially) ‘property’—that are legal categories. Only by recapturing money’s legal architecture can we understand how it operates to transfer goods, effectuate a deal, or generate stable exchange."

And talks in particular about all of the bank-related decisions that are determined by state legal institutions:

"The role of reserves, capital requirements, portfolio management; the reach of deposit insurance; the relationship of financial institutions to lenders of last resort—they form the vocabulary of reform in a world with bank-based money. All are issues of legal process. As we make the legal decisions, we will (re)make the money."

Finally, regarding the HPM-centric view - well, you're obviously welcome to disagree with their emphasis, but that's really irrelevant to whether the state theory is valid, because the state theory incorporates both bank deposits and HPM. So even if they are wrong about the relationship between HPM and endogenous money (which i don't think they are), that has little to do with bigger question about whether the state is the appropriate starting point for a story about money.

I try not to focus on policy. That's what we mean when we say MR is "apolitical". I think most people know that we haven't totally eliminated politics from economics. Heck, we even end up talking policy sometimes, but what we don't do (or try not to do) is attach specific policies to MR. That's what we mean.

And yes, I didn't cover every aspect of Desan's paper. I didn't think that was really necessary, and frankly, it has nothing to do with the points that were originally made in the comments here. You've simply changed the topic to your area of expertise and concluded that I am wrong.

Anyhow, this topic on legal constructs only scratches the surface on the many errors in MMT. There are so many other inconsistencies in the theory. This isn't even remotely close to the most controversial of them....I'll concede that your point is interesting here, but not that relevant in the bigger scheme of MMT's ability to explain how the monetary system works.

The title logo of MR on your website literally says "Economics without politics" underneath it, and you have on numerous times criticized MMTers for having a political bent in their analysis while distinguishing MR for being purely descriptive of operational realities. So if you are now suggesting what you really meant to say was that MR is "economics with politics but without policy prescriptions most of the time", I guess I can see where you're coming from, but it's certainly confusing language use from my perspective.

I didn't mean to change the topic, so maybe my linkage was insufficient - the point of mentioning those additional aspects in Desan's paper was to emphasize that what you describe as the "base case of capitalism", i.e. a system with some involuntary unemployment and a dominant licensed banking sector, is in fact highly dependent on a particular set of legal arrangements, which are in turn generated by state institutions. So although you contrast MR and MMT by saying the latter is state-centric and the former isn't, in my mind they are both state-centric by necessity, because without the state you don't have laws of property, contract, accounting, etc. It's just that in your story, those aspects are implicit and not emphasized.

I've always stated that MR is based on a view of the world that focuses on operational realities as opposed to constructing a world view around a policy agenda. I have found that one flaw in many schools of economics is that they tend to start with a specific set of policy ideas and they tend to conform their operational understandings to fit this political view. Austrians start with an anti government view and construct understandings that validate an anti-govt view. Market Monetarists tend to be laissez-fairre people who understand the need for some govt intervention, but prefer a more hands off approach so they are infatuated with what an independent central bank can do and they build their understandings around that view. You get the point. The thing about MR is that we throw out a pretty ginormous tent. Carlos and JKH are conservatives. I am more centrist. And Mike and Brett are more liberal. You'll find people of all political stripes at Pragcap every day. You don't need to be a particular political breed to understand MR. That was my hope with MR and thus far, gauging from who reads my site, I think we've succeeded in providing a fairily apolitical thought processs. Or at least LESS biased and political than many others. We're by no means perfectly apolitical, but in relative terms, I'd say we do a pretty good job.

Unfortunately, MMTers are obsessed with presenting us as conservatives. And that's just pure BS. I am probably more socially liberal than most MMTers. In fact, I'd be willing to bet good money on it. Yet Randy called me a "neocon" in his original post. That is an absurd misrepresentation and it's a very disingenuous attempt to present my views in a political way so as to dismiss them without actually confronting them. That's pretty weak if you ask me.

Lastly, I think your assertion that the govt and its legal institutions, is the cause of the unemployment, is demonstrably false. For instance, in the USA, it would cost about $100B a year to provide full employment at minimum wage. The top 1% of the country in the USA owns over $50T of the nation's wealth. So, if the top 1% of the country decided, out of the goodness of their hearts, to provide a basic income guarantee for the unemployed in the USA then you'd have your solution to unemployment right there. This proves that it is a distributional problem. It has nothing to do with laws, NFA or anything like that. This problem is the result of the way capitalists distribute profits unequally.

I can solve your JG issue on the spot. And all I need to do is understand the base case of capitalism. I tell people that we live in a monetary economy where everyone needs an income to survive, but that capitalists will never provide full employment for everyone for the reasons discussed above. It's that simple. I don't need to create this mangled story about laws, NFA and all that. I just need to understand how capitalism works in a monetary economy. That's all. And when you get enough sympathetic capitalists to understand this basic fact then a JG or BIG becomes a no-brainer. The difference between the MR view and the MMT view is that I don't need to create this tortured story about NFA and all that to come to a reasonable conclusion.

I am sorry I disagree with MMT and its views, but I am really beginning to question its relevance and the need for all this "new paradigm" stuff. I just don't see how it helps. That doesn't mean MMT, as a school, is useless, but I do think that it goes a bit off the deep end in an attempt to explain things accurately.....

If the top 1% decided to pay people a BIG, that wouldn't solve the problem of unemployment because a BIG is not the same as public job creation.

Moreover, your example does not "prove" that it's a distributional problem. You have merely proffered an alternative causal theory - one that is less persuasive in my opinion. To go back to my earlier analogy, If the top 1% owned a trillion vials of vaccine, they could halt a global virus epidemic overnight. But it would be silly to say that the root cause of the epidemic was a failure in vaccine distribution. The root cause is the existence of the virus itself. That's not to say that some 1%-designed welfare policy couldn't address the problem, but it wouldn't be targeting the root cause.

And the causal story that originates unemployment with state isn't mangled at all, it's very simple. In a monetary economy, those without access to the means of production are coerced by law to participate in the labor market, but there is no guarantee the labor market will clear in the absence of some sort of state-guaranteed job system. One could also describe this as a distributional problem concerning property title over the means of production (since if everyone owned the means of production then no one would be forced into the labor market), but that's not the same as your story about capitalist withholding of profits.

With regards to the MMT claim that MR is more conservative, as I understand it that claim is in specific regard to the issue of full employment. As Bill Mitchell has said before, either one supports a buffer stock of employed (through whatever policies are necessary to get there - one may argue that a JG is unnecessary in this regard, but i think that's a hard sell) or a buffer stock of unemployed. I have not heard any evidence that MR supports a human right to a job (something that is mentioned in the UN declaration of human rights), and the quotes PhilippeJames pulled up over at Randy's recent piece suggest you have been anti-JG in the past (although you seem to be more sympathetic now). Maybe MR is equally committed to achieving full employment, but in the absence of evidence to that effect, I think it's reasonable for MMT to call y'all out for being more conservative on the issue (which, in the context of macroeconomic discussions, is kind of a big deal policy issue).

As for whether MR is somehow "less political" than other schools of thought - that seems to assume that there is such thing as an apolitical economic theory, conceivable in the abstract if not achievable in practice. I don't believe that's true - every view is made from a viewpoint - so the idea one school is "more" or "less" political than another is a bit of a non-starter for me. There is no apolitical "grayscale" economics, just different variations of politically colored economics.

Well, in the coming years I will present my side of the story where capitalists fail to provide for full employment and you can continue to defend this story about laws and a lack of NFA. I guess everyone else will decide who is right. It's not really my place to decide for everyone else.

And since you're clearly out of the loop on the JG discussion (or being as disingenuous as everyone who cites old comments in an attempt to misconstrue the facts) I'll provide the exact timeline and events. This whole thing about the JG started in November of 2011 when I said that I was skeptical of the JG's efficacy because it had never been proven to work anywhere. Scott Fullwiler responded to me in an extremely petulant comment (eerily similar to Wray's blog post style) calling me an "ideologue". I responded to Scott saying that I was not against the JG stating: "Again, I’m not against trying it and scaling it up. "

http://pragcap.com/the-politics-of-mmt/comment-page-1#comment-90703

Then, several months later, in a totally unrelated discussion, where we were discussing the merits of unemployment, I used a personal anecdote to state the unemployment had actually motivated me. MMTers latched onto this comment and blasted it across their sites claiming that I was some evil pig who was against full employment. I responded about a month later in a succinct post stating that this was false.

http://pragcap.com/i-am-in-favor-of-full-employment

So this is all a big misconstrued lie by MMTers attempting to bad mouth me and paint me as a "neocon". Philippe and other MMTers have continued to cite that one comment and misconstrue other in a blatant attempt to lie and distort the facts. When people see the actual timeline and facts it just shows how low some MMTers will go to pass off their political agenda. And when I expose the reality of what I've actually stated it just makes you all look that much worse. I don't know why you all resort to these low ball tactics of calling people names consistently, distorting past comments and just being downright petulant. It is not helping your cause. It just makes your arguments look that much weaker - as if you have nothing to fall back on, but petty personal BS.

Anyhow, I am tired of all the misleading BS. If you guys want to continue professing this NFA, "net saving" and "money monopolist" stuff then go for it. Economists have been professing politicized BS for a thousand years. Why change it now?

I didn't distort any comments, nor did your response actually address the two claims I actually made, but i'm happy to drop this point because 1. it's unsubstantive commentary on meta-commentary, and 2. the irony of being criticized for making personal attacks AND for "professing politicized BS" like others have for 1000 years is too good not to end on.

I've stated, on multiple occasions in these comments that I am in favor of FE and that people were distorting my past comments, yet you cited some of these distortions as evidence that attempted to discredit my points.

Anyhow, here we go again. In typical fashion with an MMTer the conversation degrades and gets moved totally off topic....well played.

I am flattered that there is a group of people who archive my comments and track them so closely that they can pull old comments and use them (usually out of context) in this way. But, for future reference, you might want to provide links or cite the quotes in the proper context. That particular quote has a bolded clarification in it that says:

"This comment was written in haste and not well thought out. I have corrected my views several times in other comments and explained my position clearly, yet I continue to see people source this hasty comment as some sort of definitive view of mine. THESE PEOPLE ARE INTENTIONALLY MISLEADING EVERYONE AND BLATANTLY MISCONSTRUING MY POSITION ON THIS MATTER. I took a very personal anecdote and applied it to an aggregate concept in a form that shouldn’t have been stated as such. I do not believe there is a “need for unemployment” although I do question the efficacy of the JG as a tool in achieving prosperity. I am open-minded to the potential use of the JG, but I would prefer to see more evidence on its efficacy.

I also corrected this position in a very clear statement here since some MMT commenters started to use this one comment to maliciously and intentionally misportray my position on this.Sorry for the error here and hasty comment. That came out sounding much stupider than what I actually think on this matter. Thanks for your understanding."

http://pragcap.com/the-evolution-mmt/comment-page-1#comment-94345

Not that it matters much. My personal views (even if you were putting them in the right context) would have nothing to do with the operational matters being discussed in this comment thread. So it's interesting to see MMTers pull this nonsense where they call people names, change the point persistently and just blatantly misconstrue people's past comments so they can promote their political agenda.

Why do you engage people in this way? Do you guys think this makes you look good? Do you think it's smart to misconstrue people's opinions, spread lies and call people names? Is that how MMT plans to promote its thinking from now on because I see these tactics being used by MMTers with alarming frequency. I would recommend you guys try to tighten up your operational arguments and focus less time archiving my personal opinions (someone seems to spend a disturbing amount of time tracking my thoughts!).

As I said I'm very pleased to hear that you've changed your mind on unemployment and retracted the statement. It was extremely callous and thoughtless I'm glad that now the facts have changed you have changed your mind on the subject.

Thanks. It's great that you've been misconstruing that comment on a regular basis for 2 years straight now even though it was clarified almost immediately after I made it. It's also great that you now approve of my opinions here which never actually changed. It means a great deal to me that people who treat other people so maliciously now approve of my views.

Thanks so much for your honest interactions here and high level approval of my comments. If you could please update your records of my personal opinions I would appreciate it. And if I ever come up with any opinions in the future I'll be sure to send them by you for your personal approval and record keeping.

I find it so strange that my comments are so irrelevant to you yet you have literally archived 100's of my comments for your own records. If my comments and opinions are so idiotic then why do you bother archiving them and obsessing over my every published word? I mean, you must literally read every comment I write, yet you come here claiming I have nothing significant to say. Isn't that a little strange? Isn't it a little strange that you're archiving a total stranger's comments? I mean, I am flattered by it, but I do find it a little weird at the same time. You misconstrue the comments most of the time, but hey, we both know that by now.

Anyhow, I don't know why you take this so personally. It's not a personal thing for me at all. And hell, if I am the idiot that you think I am then surely everyone else will begin to realize it over time and I will have to die a quiet death talking into an empty hole. So why are you so worked up over this?

Don't take it so personally. If you're right then everything will work out for you in the long run. We're just having an educational debate. Why not push the debate forward rather than misconstruing comments, calling me names and writing these sulky kind of comments. Come on man. You want to educate people about MMT? Then educate them. Show them why I am wrong and why you're right. That's how you'll win people over. This name calling and ranting won't do it. You're a smart guy. Get to it.

"MMT explicitly states that unemployment is the result of a lack of govt spending. Mosler says: "Unemployment equates to the Federal budget deficit being too small"."

As usual Cullen quotes Mosler out of context. Here's what Mosler actually says in Full Employment and Price Stability:

"Post-Keynesian monetary theory reveals the essence of involuntary unemployment. Its term ‘radical endogeneity’ asserts all deposits are the accounting records of loans, and deposit money exists only in conjunction with outstanding bank loans. If, therefore, in the private sector one agent wishes to increase his holdings of net financial assets, H(nfa), this desire can only be satisfied by the reduction of another agent’s holdings of H(nfa). An agent’s net financial assets are reduced whenever either the agent increases its outstanding debt, or reduces its stock of financial assets. Net financial assets are increased by paying down debt or by increasing the current stock. In the absence of financial intervention by the government, if one agent desires employment in order to increase his holdings of financial assets, another must decide to reduce his net financial assets for a transaction to take place. If no agent is willing to reduce his net financial assets, the desired sale of labor does not occur. This is defined as involuntary unemployment.

The national accounting double entry bookkeeping system is always in balance. Entries on one side of the ledger must be accounted for with offsetting entries on the other. Investment, for example, is accounted for as savings in national income accounting, so, by definition, total investment will always equal total savings. Government deficit spending is classified as government dissaving, and the offsetting accounting entry is an increase in net private sector nominal savings. Thus, whenever the government engages in deficit spending, aggregate private sector H(nfa) is increased, with H(nfa) including offshore holdings of dollar denominated assets. Furthermore, the level of government deficit spending determines private sector H(nfa). Should the private sector desire to increase its H(nfa), this desire can be satisfied only by an increase in government deficit spending.

Unemployment can therefore be summarized as follows:

Involuntary unemployment is evidence that the desired H(nfa) of the private sector exceeds the actual H(nfa) allowed by government fiscal policy.

To be blunt, involuntary unemployment exists because the federal budget deficit is too small."

“The reality is that involuntary unemployment is caused by the fact that capitalists will always maintain a buffer of unemployed because it doesn't make sense for them to maintain full employment at all times. A capitalist system has a natural "base case" of SOME level of unemployment at all times because it is not prudent or profitable to always maintain full employment.”

Clearly Cullen doesn’t understand what Mosler is saying. If Cullen had bothered to read more carefully he would have seen that in the above quote Mosler says:

“In the absence of financial intervention by the government, if one agent desires employment in order to increase his holdings of financial assets, another must decide to reduce his net financial assets for a transaction to take place. If no agent is willing to reduce his net financial assets, the desired sale of labor does not occur. This is defined as involuntary unemployment.”

So what Cullen is saying is actually similar to what Mosler says above. Cullen says that unemployment is caused by capitalists not wanting to spend money to employ people, and Mosler says that unemployment is caused by people not wanting to spend money to employ people. Cullen doesn’t even understand this because he’s too busy making up daft arguments against MMT to bother to read carefully.

Cullen then goes on to say:

“The govt could run a gazillion dollar deficit and capitalists still won't maintain zero involuntary unemployment. It just won't happen because the govt can't force capitalists to hire everyone. They'll just save more for themselves. So MMT just has this whole point wrong.”

Obviously if the government gives money to capitalists who don’t want to spend it then there would still be unemployment. But MMT doesn’t say that the government should do this, so as usual Cullen’s argument is nonsense. In the quote above, Mosler says:

“if one agent desires employment in order to increase his holdings of financial assets, another must decide to reduce his net financial assets for a transaction to take place”

So, if a person is unemployed and seeking work so he can “increase his holdings of net financial assets”, the government can provide him with those net financial assets by employing him. It’s very simple really, but Cullen is too busy beating up straw men to bother trying to figure out what it is that Mosler is actually saying.

Bravo! See how easy that was? But I must advise - there's no need for the personal stuff. All the extra stuff about how I don't "understand" or am being daft. No need for all that. Just write your comment out in plain text and leave the personal stuff out of it. It will be much more effective as a communicative approach to teaching people about MMT. Saying that someone doesn't "understand" something is silly. In order to prove that someone doesn't understand something you have to actually show it. Saying it over and over and over again just makes it sound like you're ranting.

Anyhow, we've beat this conversation up pretty good so I won't bother responding to your comments. Besides, this conversation really only scratches the surface on MMT's errors so I'd hate to start pulling more bunnies out of the hat here. And please, try not to take my comments so personally in the future. It's not personal. It really isn't. We're just having an educational debate. That's all. All your hostility is totally unnecessary.

And seriously, don't spend too much time archiving my comments, reading everything I write and all that. It's not worth it.

“there's no need for the personal stuff. All the extra stuff about how I don't "understand" or am being daft. No need for all that. Just write your comment out in plain text and leave the personal stuff out of it”

Perhaps you should try being a bit less hypocritical in future. Your comments from above:

“MMTers totally fail to understand it. They just literally don't understand it or don't want to understand it.”

"you're right that MMT's position is political. In fact, I'd argue that it's purely political and that the economists have devised an extremely misleading explanation that tries to tie their theory into full employment.”

“There is literally not one thing that a smart Post-Keynesian needs to understand from MMT that can't be explained without all the "new paradigm" nonsense. Literally, not one thing. The only reason you seem to defend it is because of the political appeal”

I've personally been subjected to your offensive insult-ridden rants and accusations on several occasions, as have others.

Phil, stop getting so worked up. You're an anonymous guy on the internet who acts like I ran over your dog. No one knows who you are. I couldn't hurt you even if I actually wanted to (which I don't).

And in Randy's post he states explicitly, that MMT is progressive and political. But you're mad at me for pointing this out? And sorry, but you guys don't understand the equation we use. Instead, you call it "idiotic" and "retarded". I've actually never seen an MMTer explain it properly.

Anyhow, between the stalking, comment archiving and anonymous emotional rants, this is all getting a little weird for me. I suggest you stop wasting so much of your days worrying about what I think. It's seriously not worth it. I am a nobody. So let it go.

Your equation doesn’t show or explain anything which isn’t already explained by the sectoral balances equation used by MMT. It’s just a simplified version which contains less information.

JKH’s argument is that private investment is really important to private saving, and that net saving is somehow less important or 'marginal' in some way. But S=I+(S-I) doesn’t actually show that. The equation doesn’t actually tell you anything much in itself. You can’t use that equation to demonstrate that private investment “is the backbone of private saving”, whatever that is supposed to mean. There’s nothing in that equation which tells you that.

Note I am not saying that private investment is not important. All I am saying is that your equation doesn’t demonstrate anything which isn't already demonstrated by the sectoral balances equation.

The sectoral balances equation is:

S = I + (G – T) + (X – M)

And you equation is S = I + (S – I)

There is nothing in your equation which isn’t already shown by the sectoral balances equation.

Phil, the reason it "doesn't show that" is because you're not describing it in the right context or presenting it properly. Anyhow....

What I really don't get is why you care so much. Oh no, someone said MMT might have something wrong! Let's call them names, stalk them online and act like the earth is collapsing in on us. You need to take a deep breath, stop being so hyper-sensitive about everything and learn to interact with people like you would in a real-world setting. I know you think you can just rant and rave because you're anonymous, but that really doesn't make it okay. You are a very active and loud proponent of MMT. You should represent them in a more mature and upstanding manner. Going around to various sites calling people names all the time is not helping you guys.

Matt Bruenig retweeted a perfect quote from Matt Yglesias last night:

"MMT = a not-so-crazy idea espoused by a lot of people who often act crazy."

That's totally dead right. MMT is great in a lot of ways. But you guys are taking a wrecking ball to it with your online behavior. This is constructive advice if you should choose to take it that way....

(private saving - private investment), or (S - I), is what we refer to as private 'net saving', or the private sector balance.*

private net saving, or (S - I), equals (G - T) + (X - M)

This is the sectoral balances equation:

(S - I) = (G - T) + (X - M)

which can also be written as:

S = I + (G - T) + (X - M)

This arrangement is the same as S = I + (S - I), except that the latter equation contains less information.

S = I + (S - I) tells you nothing that is not already shown by S = I + (G - T) + (X - M) or (S - I) = (G - T) + (X - M). It offers no additional information or insight. It does not in itself tell you anything in particular about the relative importance of either private investment or private net saving.

*This is how Wynne Godley refers to the private sector balance:

“PNS is private net saving—that is, private disposable income less total private expenditure, including both consumption and investment… Private net saving is always identically equal to the government’s budget deficit plus the current account surplus.”

That's not a very instructive way of looking at things. By rearranging the equation into S=I+(S-I) you can better understand the driver of S as I and not (S-I) as MMT often implies. MMT vastly overstates the importance of (I – S) + (G – T) + (X – M) = 0 in their work and often concludes that we are all "worse off" if (I-S) isn't always positive. This is extremely misleading. Thinking of "net saving" as (S-I) is an extremely narrow view of the actual monetary system. In fact, in the USA (S-I) amounts to about 5% of total private sector net worth. The amount of domestically held T-bonds in the private sector aren't insignificant, but it's hardly the "equity that supports the entire global credit structure" as Kelton recently stated....

Now we're having a discussion. See, this doesn't have to be combative. Nor do I intend for it to be.

The more I think about this the more I think it might be a case of talking past one another. You see, I use economic data mainly for market projections. I construct models for my job which help me decipher what future economic conditions might look like. MMT seems to be doing something very different by focusing primarily on policy.

An equation like (I – S) + (G – T) + (X – M) = 0 is pretty useless for economic forecasting in my opinion. It's not granular enough. Breaking it down into S=I+(S-I) adds some much needed perspective. Especially when you consider that (S-I) is only 5% of private sector net worth. From the perspective of the drivers of private sector net worth in a normal economic environment you could say that we're saying something kind of like 100 = 95 + (100-95). During the balance sheet recession when private investment cratered that balance was totally different. (S-I) became the key driving component. But as the private sector has healed we've entered a much more normalized environment where once again I is the driving factor. So, I see this as a very powerful conceptual tool for forecasting and I use it specifically in several economic models I've constructed.

The problem is, I think we're seeing things a bit differently. MMT focuses primarily on policy. JKH, Mike and myself are all market practitioners. As lovely as full employment sounds, it's not why we analyze economics. To us, an economic equation that can't help with forecasting and market analysis, it useless.

Now, maybe you guys don't focus on (G-T) as a policy tool. Maybe you emphasize the I component of S = I + (G - T) + (X - M) much more than I have claimed. IT doesn't appear that way to me. It appears as though MMT focuses almost exclusively on the 3 sector model and how (G-T) can be used to drive (S-I). Maybe I am wrong there. Maybe I've missed all the literature stating the importance of private sector investment and putting it in the right context. If so, I am happy to be proven wrong. But I don't know if I am. I think MMT and its economists are more concerned with policy and how we can use economics to steer the world towards full employment by using (G-T). And, in my opinion, that misses some pretty important components. But again, I am coming at this from the perspective of a market practitioner and not a policy analyst. So maybe there's just a difference in goals.

Anyhow, I really wish this wasn't taken so personally. There's no need for all this hostile commentary and very personal stuff. And I hope this comment clarifies my views some.

Your comment does not explain how the equation S=I+(S-I) shows that "the driver of S is I and not (S-I)".

In order to argue that "the driver of S is I and not (S-I)", you stated that I is usually a larger number than (S-I). This is additional information, which is not part of the equation. It is not information that comes from the equation itself. The equation does not tell you that I is usually a larger number than (S-I).

Your assertion that "the driver of S is I and not (S-I)" is not based on the equation itself. It is based on the statement that I is usually a larger number than (S–I).

At no point in your comment did you explain how the equation S=I+(S–I) shows that "the driver of S is I and not (S-I)". All you did was state that this is the case because I is usually a larger number than (S-I).

Phil, we hashed all of this out in a 931 comment thread back in 2012 at the MR site. JKH has also been pretty explicit about how best to apply the equation. Of course letters in an equation alone don't tell you much. You have to understand how to apply the concept. That's the whole point in my view! An economic equation on its own is useless if it can't be used for forecasting.

And it's not just about understanding that I is usually a larger number than (S-I). It's really about understanding that private sector S is driven by I through the way that we produce goods and services that enhance future output, living standards, etc. (S-I) matters, but in the bigger scheme of things, it matters a lot less to long-term economic stability than a healthy I component.

You seem to be implying that MMT puts this in the proper context and has done a huge amount of work on I being important relative to (S-I). Are you saying that MMT does not focus almost exclusively on the (G-T) component? Are you saying there's literature out there that details this? If so, I am happy to be proven wrong. But it's my opinion based on what I've read from MMT economics, that they focus almost exclusively on the (G-T) component as a driver of (S-I) in an effort to promote their policy views. Am I wrong? If so, I am happy to admit it.

“Of course letters in an equation alone don't tell you much. You have to understand how to apply the concept.”

The point is that your equation does not show that "the driver of S is I and not (S-I)".

In order to argue that "the driver of S is I and not (S-I)" you have to make additional statements, such as that ‘I is usually a larger number than (S-I)’. This statement is not derived from the equation itself. It is completely external to the equation.

Unless you can actually explain how the equation itself shows that "the driver of S is I and not (S-I)", you can not claim that it does so.

Your “concept” is that "the driver of S is I and not (S-I)". But this concept does not come from the equation S=I+(S-I) itself. There is nothing in that equation which shows or proves your “concept”.

Once again, the equation does not show that “private sector S is driven by I through the way that we produce goods and services that enhance future output, living standards, etc”. Nor does it show that “(S-I) matters, but in the bigger scheme of things, it matters a lot less to long-term economic stability than a healthy I component”. These are additional assertions made by you, which are not derived from the equation itself in any way whatsoever. There is nothing in the equation that tells you either of those things.

So the question is, what does your equation actually explain that is not explained by the usual sectoral balance equation? Please try to be precise rather than vague.

Sigh. Phil, that was explained in detail long ago and in the literature we've produced. It should be painfully obvious that an equation is pretty meaningless if you don't apply some context to it. The context WAS THE WHOLE POINT! It's the point that all of you guys have missed this whole time as you've ridiculed it. You literally didn't understand the entire point of the conversation, yet you continually berated people and bad mouthed them over it. The "additional assertions" are what matter most.

Your equation "(I – S) + (G – T) + (X – M) = 0" doesn't say anything that the GDP equation doesn't say without providing some context. But I am not calling MMTers idiots and building these absurd strawman arguments because I don't understand the point of the SFB equation. But that's precisely what you're doing. Sorry, but it's a little unfair.

Again, this is all explained in the papers we've produced. There's only 2 or 3 of them. Reread them if you must.

And if you come up with that MMT literature emphasizing the importance of I relative to (S-I) I'd be happy to say that I am all wrong on this stuff. But we both know MMT is a policy centric theory that uses the SFB to promote a view of the world starting with (G-T). That's fine, but it doesn't give you the right to rant and insult people for criticizing such a clearly policy centric perspective of the world.

“that was explained in detail long ago and in the literature we've produced.”

I’ve just read through the relevant section in your text (understanding the modern monetary system) and can find no explanation of how the equation S=I+(S-I) shows that "the driver of S is I and not (S-I)", or supports any of your other claims.

On the subject of S=I+(S-I) you write:

“The Importance of Understanding S = I + (S-I)

Although government can help to drive economic growth (if used properly) we should not forget that investment is the backbone of private sector equity. This simple rearrangement of the private sector component highlights this fact and helps to avoid thinking that I>S might be a negative for the economy when the reality is that a high level of Investment is generally good for the economy (as seen in our corporate profits chart earlier).”

- There is no explanation here of how the equation S=I+(S-I) shows that “investment is the backbone of private sector equity”, or that I>S is not “a negative for the economy”.

After deriving your equation by rearranging the sectoral balances equation you then write:

“A good way to think about all of this is to understand that the private sector can create real wealth entirely independent of the government. For instance, a farmer does not need the government to turn 2 cows into 10. The farmer has achieved real wealth creation regardless of the government's spending position. The government can increase spending when milk sales are low (which will increase the farmer’s revenues) and increase the private net financial assets, but we should not assume that this is always the appropriate policy. It's best to think of government as being a facilitator of wealth creation and not the driver. Hence, our focus on S=I+(S-I) with the emphasis on the idea that "the backbone of private sector equity is I, not Net Financial Assets”."

- Again there is absolutely no explanation here of how the equation S=I+(S-I) shows that "the backbone of private sector equity is I, not Net Financial Assets”."

“Turning quickly to the data, the US general government deficit averaged around one-sixth of gross private domestic investment during the period 1960-2007, and fourth-fifths during 2008- 2010. It should not be controversial at all that the main driver of private saving is usually private investment but that during economic downturns the role of government deficit-spending can become more important.”

- Again there is no explanation here of how the equation S=I+(S-I) shows that “the main driver of private saving is usually private investment”.

You then write:

“MR understands that consumption and production are two sides of the same coin and that both can help grow the coin. We highlight this point by expanding on the sectoral balances equation and showing that S = I + (S-I) in order to emphasize that I>S does not mean the private sector financial position is necessarily deteriorating. So while the sectoral balances equation is useful in understanding the dynamic of the system it should not be used to imply that the private sector’s financial position is necessarily deteriorating because I>S . When one takes this perspective you bring a more balanced understanding of the way our monetary system actually works”

- Again there is no explanation here of how the equation S=I+(S-I) shows that “I>S does not mean the private sector financial position is necessarily deteriorating”.

And then:

“Private sector saving can be decomposed into the amount of saving created by investment “I” and the amount of net financial assets transferred from other sectors (S – I). That is the focus of the equation S = I + (S – I) as it highlights the fact that the private sector is the primary driver of economic prosperity while government is a powerful facilitator.”

- Again there is no explanation whatsoever of how the equation S=I+(S-I) shows that “the private sector is the primary driver of economic prosperity while government is a powerful facilitator.”

And:

“When one connects the dots between production and the MR Law you can begin to understand why private sector output matters so enormously to the living standards of the society. In this regard, I is the core of improved living standards, because it is through I that we create things that make us more productive and therefore give us more time. But we must maintain a balance here and never forget that government can be an important facilitator of the wealth accumulation process who wields powerful tools that can aid us in driving demand, stabilizing economic growth and helping to improve overall living standards.”

- Again no explanation at all of how the equation S=I+(S-I) shows that “I is the core of improved living standards, because it is through I that we create things that make us more productive and therefore give us more time.”

All in all, there is not a single explanation in your whole text of how the equation S=I+(S-I) supports any of your statements and claims.

You say that it is "important to understand" S=I+(S-I), which is a "very important identity". But nowhere do you actually explain WHY it is important. Nowhere do you actually explain HOW it supports any of your statements regarding investment and saving.

None of the assertions in your text are derived from the equation you claim is so important. The equation actually serves no purpose in your text at all - it doesn't explain anything, or at least you never bother to explain why you think the equation explains anything.

I am not sure why you're having so much trouble connecting the dots here and understanding the context in which we use this. If you don't get it then you just don't get it. Repeating that our equation and explanation doesn't connect the dots isn't true just because you keep declaring it that way. Obviously, we think it's pretty clear and so do lots of other people who have read it. Marc Lavoie even emailed JKH to express his thanks for the clarity in the equation. Why MMTers can't understand it is truly baffling.

If you think we're unfairly critical of MMT's obsessive use of the 3 sector SFB and its focus on (G-T) then simply point me to the literature where they discuss all this stuff about how private investment is so important to the economy and how it is MUCH more important than (G-T) as a driver of private sector saving. Surely, if you're right then there must be entire papers dedicated to this point, no? I am happy to be proven wrong if I am.

So the idea that we don't understand how it is all derived is just ridiculous. We had these conversations 2 years ago and here you are still failing to understand the point. Maybe we're explaining it terribly, but I don't know.

Take the current account out of the picture for a moment; i.e. assumed it’s balanced.

Moreover, assume the cumulative current account is perfectly in balance and the “net international investment position” is net zero.

Now consider the government’s role

The government provides NFA injections through budget deficits

But the budget deficit = (S – I), when the current account is balanced

So S = I + budget deficit (in this case)

And what that says is that for a given I, the government is leveraging up the private sector’s saving by running a deficit and injecting NFA.

When you translate that from flows to stocks (cumulative flows), it says the government is leveraging up the existing private sector equity base (savingS required to support outstanding stock of cumulative “I”), by adding more private sector equity created by the government’s NFA injections.

So there you have the idea that the government is performing a useful leverage function in augmenting the existing private sector equity base – a base that supports a given level of cumulative “I” as an outstanding stock.

And you just have to consider household net worth to get a rough feel for the proportionate dollars involved here.

The total is about $ 60 trillion (I tend to round to the nearest $ 10 trillion when making points of concept).:)

The government debt (reserves, currency, and bonds, really), net of internally held stuff like social security, is about $ 10 trillion (= NFA of non government with government).

Because we’ve assumed the cumulative current account is in balance, the household sector’s NFA balance with the government is $ 10 trillion (some of that could be indirect through household financial claims on businesses that hold NFA with government).

The rest of the household sector’s net worth is $ 50 trillion, and that consists of a combination of directly held physical investment (e.g. real estate) and financial claims on what is in effect the ultimate physical investment held by the business sector.

So that says that the value of cumulative “I” is $ 50 trillion as per that representation.

So there you have $ 10 trillion leveraging $ 50 trillion into $ 60 trillion.

I.e. the government is issuing $ 10 trillion in debt (reserves, currency, and bonds really, but analogous to debt) in order to leverage $ 50 trillion of private sector equity into $ 60 trillion.

In the above quote, JKH explains why he thinks that “I is the backbone of S”. He says that cumulative private investment is larger than domestically-held government debt. He also says that (for some reason) he sees government debt as a form of leveraging of private savings. On the basis of this argument he concludes that “I is the backbone of S”.

What I think of his argument is not important because his argument is simply not relevant to my question.

At no point does JKH explain why the equation S=I+(S-I) shows that “I is the backbone of S”, or that “the driver of S is I and not (S-I)”.

JKH gives reasons for why he thinks that “I is the backbone of S”, but at no point does he explain how the equation S=I+(S-I) shows that “I is the backbone of S”. So his comment is not relevant to my question.

My question was: how does the equation S=I+(S-I) show that "the driver of S is I and not (S-I)"? Or alternatively, how does the equation S=I+(S-I) show that “I is the backbone of S”?

You claim that S=I+(S-I) shows that. This is why you say it is a very important equation. But as yet you have not been able to explain how it shows that. And if you can’t explain how S=I+(S-I) shows that "the driver of S is I and not (S-I)" or that “I is the backbone of S”, you should not claim that it does, and you should not claim that it is important for that reason. If you accept that it is not important for that reason, the next question is: why is it important?

Just skimming quickly, Cullen is doing an excellent job of explaining this, which is what I expect, because he has thought a lot about this.

The question of what an equation "says" is an epistemological one. There is a fundamental reason for the nature of the algebraic decomposition in this one. I tried to cover that in various places over the past two years.

The key question really isn't where the equation points to the importance of I. The main point is that the right hand side of the equation is deliberately written in binary form - so as to separate out the I piece on balance with the non-I piece. And in doing so, (S - I), is very intentionally not decomposed - because that would distract from the purposeful splitting of private sector saving between that which comes from internal private sector investment and that which comes from somewhere else. It turns out the the "somewhere" else is typically government budget deficit, netting any current account effect. But the highest logical level of decompositon is binary - that which comes from the investment that comes from within the private sector and that which comes from anything that can deliver it from outside the private sector (whether that be government or foreign).

So the point then is not "where does it say" that I is so prominent, but that such a binary decomposition combined with a little bit of intellectual elbow grease and investigation makes it evident in the extreme that it is private sector investment that has been responsible for the accumulation of almost all private sector saving into savings and wealth in stock form. Those are the kind of numbers that Cullen is throwing out.

Moreover, the binary decomposition calls attention to the fact that MMT historically has conflated S with (S - I), entirely leaving out the logic of I generated S. This is a fact. It is very well documented. It is ideologically driven.

And finally this opens up the debate as to how to consider in a fair and unbiased way the potential sources of private sector saving - at the margin - because the potential for marginal contribution from investment sourced saving should be weighed on balance with the potential fo marginal contribution from (S - I) sources.

The epistemological issue is how does an equational form constitutes a catalyst for thinking about all of this from a balanced starting point. The equation provides that window. The interpreter has to do a little thinking to take it to the immediate level of implication. That's the required elbow grease. Equations aren't intended to do peoples' thinking for them in total.

"MMT historically has conflated S with (S - I), entirely leaving out the logic of I generated S. This is a fact. It is very well documented. It is ideologically driven."

Well said. Phil and the other MMTers don't seem to understand this point. And they also don't seem to understand how MMT conflates and distorts the idea of "net saving" by deriving it from (G-T). I've given Phil the chance to prove me wrong here, but we all know the MMT literature is govt centric with a focus on (G-T). There's almost no focus at all on private sector I in the MMT world. So they can say "we already knew that!", but it's sure not documented or emphasized....

He hasn’t explained anywhere in this comment thread or in his text (understanding the modern monetary system) why the equation S=I+(S-I) is important, so I don’t know how you managed to reach that conclusion.

He has explained a bit about why he thinks that private investment is important, but that is a different issue to why the equation S=I+(S-I) is important.

“The key question really isn't where the equation points to the importance of I. The main point is that the right hand side of the equation is deliberately written in binary form - so as to separate out the I piece on balance with the non-I piece. And in doing so, (S - I), is very intentionally not decomposed - because that would distract from the purposeful splitting of private sector saving between that which comes from internal private sector investment and that which comes from somewhere else.”

In order to know where (private saving – private investment) comes from, you need to use an equation like S=I+(G-T)+(X-M). This equation tells you more than S=I+(S-I).

Both equations tell you that private saving = private investment plus something else. There is nothing particularly “important” about S=I+(S-I) in that respect. S=I+(S-I) just gives you less information than S=I+(G-T)+(X-M). It does not provide you with any additional insight.

S=I+(S-I) is not a “stupid” equation, as some MMTers have said, but it is not an “important” equation either. I don’t have a particular problem with the equation as such. But it’s disingenuous to argue that it somehow shows that “I is the backbone of S”, or that “the driver of S is I and not (S-I)”, when it does no such thing.

The problem is that Cullen and others claim that this equation shows something that, in actual fact, it doesn’t. And when you ask them to give an explanation for why this equation is supposedly “important”, they are unable to do so. All you get in response is vague rhetoric, as usual.

Second to last but not the least, this innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, with results in real investment being directed in a manner totally divorced from public purpose. In fact, it’s my guess that this deadly innocent fraud might be draining over 20% annually from useful output and employment - a staggering statistic, unmatched in human history. And it directly leads the type of financial crisis we’ve been going through.

It begins with what’s called “the paradox of thrift” in the economics textbooks, which goes something like this: In our economy, spending must equal all income, including profits, for the output of the economy to get sold. (Think about that for a moment to make sure you’ve got it before moving on.) If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or else the output of the economy won’t get sold.

Unsold output means excess inventories, and the low sales means production and employment cuts, and thus less total income. And that shortfall of income is equal to the amount not spent by the person trying to save. Think of it as the person who’s trying to save (by not spending his income) losing his job, and then not getting any income, because his employer can’t sell all the output.

So the paradox is, “decisions to save by not spending income result in less income and no new net savings.” Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings. Consider this extreme example to make the point. Suppose everyone ordered a new pluggable hybrid car from our domestic auto industry. Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand. That means we’d all be working on new plants and equipment - capital goods - and getting paid. But there would not yet be anything to buy, so we would necessarily be “saving” our money for the day the new cars roll off the new assembly lines. The decision to spend on new cars in this case results in less spending and more savings. And funds spent on the production of the capital goods, which constitute real investment, leads to an equal amount of savings.

I like to say it this way: “Savings is the accounting record of investment.”

Professor Basil Moore

I had this discussion with a Professor Basil Moore in 1996 at a conference in New Hampshire, and he asked if he could use that expression in a book he wanted to write. I’m pleased to report the book with that name has been published and I’ve heard it’s a good read. (I’m waiting for my autographed copy.)

Unfortunately, Congress, the media and mainstream economists get this all wrong, and somehow conclude that we need more savings so that there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits in the banking system, it is investment that creates savings.

So what do our leaders do in their infinite wisdom when investment falls, usually, because of low spending? They invariably decide “we need more savings so there will be more money for investment.” (And I’ve never heard a single objection from any mainstream economist.) To accomplish this Congress uses the tax structure to create tax-advantaged savings incentives, such as pension funds, IRA’s and all sorts of tax-advantaged institutions that accumulate reserves on a tax deferred basis. Predictably, all that these incentives do is remove aggregate demand (spending power). They function to keep us from spending our money to buy our output, which slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even.

This is why the seemingly-enormous deficits turn out not to be as inflationary as they might otherwise be.

In fact it’s the Congressionally-engineered tax incentives to reduce our spending (called “demand leakages”) that cut deeply into our spending power, meaning that the government needs to run higher deficits to keep us at full employment. Ironically, it’s the same Congressmen pushing the tax- advantaged savings programs, thinking we need more savings to have money for investment, that are categorically opposed to federal deficit spending.

And, of course, it gets even worse! The massive pools of funds (created by this deadly innocent fraud #6, that savings are needed for investment) also need to be managed for the further purpose of compounding the monetary savings for the beneficiaries of the future. The problem is that, in addition to requiring higher federal deficits, the trillions of dollars compounding in these funds are the support base of the dreaded financial sector. They employ thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part, that means investing in publicly-traded stocks, rated bonds and some diversification to other strategies such as hedge funds and passive commodity strategies. And, feeding on these “bloated whales,” are the inevitable sharks - the thousands of financial professionals in the brokerage, banking and financial management industries who owe their existence to this 6th deadly innocent fraud.

Most people are accustomed to viewing savings from their own individual point of view. It can be difficult to think of savings on the national level. Putting part of one's salary into a savings account means only that an individual has not spent all of his income. The effect of not spending as such is to reduce the demand for consumption below what would have been if the income which is saved had been spent. The act of saving will reduce effective demand for current production without necessarily bringing about any compensating increase in the demand for investment. In fact, a decrease in effective demand most likely reduces employment and income. Attempts to increase individual savings may actually cause a decrease in national income, a reduction in investment, and a decrease in total national savings. One person's savings can become another's pay cut. Savings equals investment. If investment doesn't change, one person's savings will necessarily be matched by another's' dissavings. Every credit has an offsetting debit.

As one firm's expenses are another person's income, spending equal to a firm's expenses is necessary to purchase it's output. A shortfall of consumption results in an increase of unsold inventories. When business inventories accumulate because of poor sales: 1) businesses may lower their production and employment and 2) business may invest in less new capital. Businesses often invest in order to increase their productive capacity and meet greater demand for their goods. Chronically low demand for consumer goods and services may depress investment and leaves businesses with over capacity and reduce investment expenditures. Low spending can put the economy in the doldrums: low sales, low income, low investment, and low savings.

When demand is strong and sales are high businesses normally respond by increasing output. They may also invest in additional capital equipment. Investment in new capacity is automatically an increase in savings. Savings rises because workers are paid to produce capital goods they cannot buy and consume. The only other choice left is for individuals to "invest" in capital goods, either directly or through an intermediary. An increase in investment for whatever reason is an increase in savings; a decrease in individual spending, however, does not cause an increase in overall investment. Savings equals investment, but the act of investment must occur to have real savings.

The relationship between individual spending decisions and national income is illustrated by assuming the flow of money is through the banking system. The money businesses pay their workers may either be used to buy their output or deposited in a bank. If the money is deposited in a bank, the bank has two basic lending options. The money can be loaned to: 1)someone else who wishes to purchase the output (including the government), or 2) to businesses who paid the individuals in the first place for the purpose of financing the unsold output. If the general demand for goods declines the demand for loans to finance inventories rises. If, on the other hand, individuals spent money at a high rate the demand for purchase loans would rise, inventories would decline and the level of loans to finance business inventories would fall.

The structural situation in the U. S. is one in which individuals are given powerful incentives not to spend. This has allowed the government, in a sense, to spend people's money for them. The reason that government deficit spending has not resulted in more inflation is that it has offset a structurally reduced rate of private spending. A large portion of personal income consists of IRA contributions, Keoghs, life insurance reserves, pension fund income, and other money that compounds continuously and is not spent. Similarly, a significant portion of business income is also low velocity; it accumulates in corporate savings accounts of various types. Dollars earned by foreign central banks are also not likely to be spent.

The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money.

Once we recognize that savings does not cause investment it follows that the solution to high unemployment and low capacity utilization is not necessarily to encourage more savings. In fact, taxed advantaged savings has probably caused the private sector to desire to be a NET saver. This condition requires the public sector to run a deficit, or face deflation.

In fact, I think we both know there is nothing we could say that would let you be done because you are, for some reason, wedded to MMT and all of its concepts without even the remote potential of being convinced or considerate of an opposing view....That said, I will respond one last time before you make your final sweeping rejection of everything we say.

1) You said:

"In order to know where (private saving – private investment) comes from, you need to use an equation like S=I+(G-T)+(X-M). This equation tells you more than S=I+(S-I)."

But in another comment you point out that

"S = I + (G - T) + (X - M) which can be re-written as

S = I + (S - I)"

If you simply close the economy then the equation is S = I + (G - T) which can be rearranged as S = I + (S - I).

You said our equation doesn't tell you anything, but that the first one does. But they're the same thing! So you're obviously just contradicting yourself now as you try, at any cost, to reject its use.

2) The equation alone has NOTHING to do with our point. You have to actually apply figures and context to it. I use the equation to model the economy and understand where growth might come from. For instance, I've been rather bullish all year while Warren Mosler has been extremely bearish on the economy due to the declining deficit. He was overly focused on S being derived from (G-T) as a function of the sequester and budget deficit size. He not only missed the private investment boom, but he also made a mistake deriving where (G-T) was coming from because (G-T) was shrinking in 2013 due to rising T, not shrinking G. MMTers, as a whole, have misled a huge number of people on this concept over the last few years by implying that we are all worse off because the deficit is declining. But in fact, the unemployment rate is down 1% this year, industrial production is at all-time highs, GDP was 3.6% last quarter and the stock market is booming. Anyone who listened to Mosler and got bearish using the (G-T) emphasized model has been crushed this year. So, you might not think the equation provides perspective, but if you don't then you're just thinking of it in the same sense that Mosler is and you've probably been misled this year by not focusing on the private investment boom that's occurred during the shrinking deficit. If you used the S = I + (S-I) model and applied it properly then you understood that there was a high probability that Mosler was overemphasizing the budget deficit's impact in 2013. In essence, S = I + (S-I) already won this debate for us. The people using the (G-T) centric model lost.

3) The citations you provide from Mosler say NOTHING about MMT's focus on I relative to (S-I). Not one thing. They simply explain why I is not financed by S. The quotes you provide literally tell us nothing about how MMT uses (S-I) relative to I or why they think private investment matters more than (S-I). There is ZERO literature on this. Not even one paper. And the mistakes are well documented all over the place. I could pull dozens of mistaken quotes by MMT economists on this, but the easiest place to look is a comment thread on Pragcap from a few years ago where Scott Fullwiler is schooled on the matter by a good friend of mine named "CP".

If you take the time to go through that comment thread it becomes painfully obvious that MMT not only misunderstands this concept, but gets some very basic points wrong. This reader "CP" is making the EXACT same point we have been trying to make for years now regarding our use of the equation. And this mistake is in Randy's latest book, it's in Mitchell's texts, it's in Kelton's text, etc. It's a mistake that is everywhere. Maybe MMT is changing its position on this matter, but I seriously doubt it and it would be incredibly contradictory if they did....

4) Lastly, the Mosler links are not only hypocritical (since Mosler made and makes his living as one of the "sharks" - in fact, he was a hedge fund manager which is the absolute worst kind of "shark" there is), but based on a very basic flaw that many financial professionals make. Mosler assumes that all of these investment "plans" are forcing people to "save". But that's just nonsense. These savings plans are simply vehicles through which people allocate their existing savings. In fact, these instruments exist in the first place because they were issued for the purpose of real investment. And all securities held are always held by someone. These instruments (like corporate bonds and stocks) helped firms make real investment and now trade on secondary markets as savings vehicles held by SOMEONE at all times. They do not capture new savings. And in fact, they represent a portion of the private sector's unrealized income via the capital gains component of the instruments. They funded investment and are now simply exchanged by savers who want to allocate their savings to particular instruments. The savings plans that are sometimes used to pool these assets are simply vehicles through which the allocation of these instruments is incentivized. They do not increase the amount of these instruments which will be held because they will be held, by definition, until the day they are retired by the issuing firm. Mosler not only ignores that the instruments helped fund real investment, but he falsely blames them for contributing to the problem when in fact, they helped to finance the most important things firms do - INVEST!. And then he calls people who charge fees on the sale of these products (HIMSELF) "sharks".

The whole thing is not only a contradiction, but based on a total misunderstanding of financial concepts. Unfortunately, it's a common one in the financial business, but not one I would expect a guy as savvy as Warren.

In short, the mistakes here are well documented and you clearly fail to want to understand them. Instead, you call people names and simply keep saying that we don't understand while clearly contradicting yourself in your insult-laced commentary. That's fine. I am not here to twist your arm into seeing things our way.

“You said our equation doesn't tell you anything, but that the first one does. But they're the same thing! So you're obviously just contradicting yourself now as you try, at any cost, to reject its use.”

No. You claim that S=I+(S-I) is a really “important” equation. The problem for you is that you don’t know how to explain why it is “important”. In your text (understanding the modern monetary system) you simply assert that it is “important”, without ever bothering to explain why. In this comment thread I repeatedly asked you to explain in clear terms why it is “important”, and you were unable to provide a coherent answer.

“The equation alone has NOTHING to do with our point. You have to actually apply figures and context to it.”

Ok, I’m glad you acknowledge that your equation, in itself, tells you nothing. Perhaps you could now amend your text (understanding the modern monetary system), and inform people that your equation does not actually tell you anything “important”, and as such is not an “important” equation.

I don't get it. You want me to amend my paper, but you have spent countless comments calling me an "idiot" and declaring that my work is basically irrelevant. Why do you care about a paper I wrote if it's idiotic and irrelevant? Why do you even care about us at all? Why do you care what MR has to say? If you're right about MR and its insignificance then why waste all this time and effort on it? Why not just let it sink into oblivion like any idiotic piece of work will?

I suggest you amend your lifestyle and stop worrying about what MR has to say. Okay?

You made a relevant point during all of this? No, all you did was get mad and write a lot of words. Oh, and you proved that you have a strange obsession with me which leads you to worry about my work and archive it. That's all.

"So the point then is not "WHERE does it say" that I is so prominent, but that such a binary decomposition combined with a little bit of intellectual elbow grease and investigation makes it evident in the extreme that it is private sector investment that has been responsible for the accumulation of almost all private sector saving into savings and wealth in stock form... The interpreter has to do a little thinking to take it to the immediate level of implication. That's the required elbow grease. Equations aren't intended to do peoples' thinking for them in total."

So, if one is open to the idea that this is not a "stupid equation", it becomes a catalyst for that kind of appreciation. Also, one thing to consider is that there an awful lot of people in the blogosphere who have difficulty with basic accounting (a number of them are economists). And quite a few of those people have been "learning" their accounting from MMT, by default, to the degree they've been attracted to MMT. The equation is intended to invite the question about how big I is relative to (S - I), among other things, and how that cumulates to the stock representation of each (e.g. by looking at Fed Flow of Funds accounting numbers).

Conversely, my impression is that some of those leading lights who reactively regard the equation as "stupid" are in effect simply paranoid about the idea that it might distract from an ideological fixation on (S - I) by putting I right along side it - with the question in each case of - how big and how important? That's the only way I can account for the incredibly defensive and unnecessarily childish response in certain cases. It appears to me that you are at least not doing that - although I think you are expecting a justification for it that really shouldn't be that necessary - assuming one can get past those utterly childish reactions to it. So I think you may be looking for something that shouldn't be necessary in the equation itself, given some appreciation for what it is intending to shed some light on.

"The citations you provide from Mosler say NOTHING about MMT's focus on I relative to (S-I). Not one thing. They simply explain why I is not financed by S. The quotes you provide literally tell us nothing about how MMT uses (S-I) relative to I or why they think private investment matters more than (S-I). There is ZERO literature on this. Not even one paper. And the mistakes are well documented all over the place."

100 per cent accurate. And dumping reams of dulcet sayings from the great leader isn't an effective way of engaging in debate on points of logic and focus. But it does tend to be a modus operandi of the great one's followers.

BTW, this idea that the S = binary equation doesn't impart anything useful beyond what is already contained in the 3 sector model is fundamentally contradictory to MMT's own basic approach to life.

That's because the 3 sector model is itself a direct derivation of the national income equation.

If the suggested logic were true, Godley would never have developed sector balances, MMT would never have copied it, and Goldman Sachs would never have used it.

New insight? Ha. As if any MMTer even understands the concept! Read the above pragcap link where MMT's accounting expert getting absolutely schooled on this exact point.

This is just too funny. The reason you don't understand our point is because you think you "learned" the accounting from MMT. It appears to me that all you learned from MMT was how to be nasty and excessively long winded in trying to make your point.

Phil, you archive my quotes. You obsess over my comments. You have dedicated countless hours, over the last 2 years, to responding to my posts. You are obsessed with my paper on SSRN.

MMT keeps saying they don't respect or care about my work, but here we are having a discussion because Prefect Larry Wray dedicated an entire post to me.

You're just full of contradictions these days!

PS - It's become clear that you're now just confused about the concept of I generating S. This concept has not been properly or accurately discussed in a single MMT paper or blog post. The confusion that MMTers have with S = I +(S-I) is derived directly from their inaccurate understanding of this concept. That's why JKH went into some detail in this in his original paper on the concept. You think you learned this from MMT, but you didn't. You learned the muddled MMT version. They don't have this point right and they never have. You learned the concept incorrectly and now you're over here ranting and insulting us because you think you "learned" something from MMT that you didn't.

Sigh. You just spent 5 days involved in a 110 comment thread that is about my opinions....

And next time you decide to engage my opinions (which will likely be sooner rather than later given that you can't stop obsessing over them) try to do so in a way that isn't totally inflammatory and hostile. The petulant behavior within MMT in recent months is unnecessary and is really starting to eat away at the theory's credibility.

Boy, just caught up to this thread. Bet WS wishes he'd never opened up this can of worms!!

I have one thought about one point made in this thread. The idea that the NFAs represent a relatively small portion of our household wealth, ~5% or so.

First, Im not sure 5% is insignificant at all. What if you told someone their investment returns were going to drop 5% next year? What if some accountant forecasted to the CEO that their sales would fall 5% next quarter?

My point is that in our highly integrated monetary world, 5% is a pretty significant number. Its a number that is high enough to have great affects on financial decisions.

Additionally, saying that the cash in my account only is 5% of the value of my total assets misses a point that is important I think. I have that 5% in cash for a reason, and I might do a lot of things that affect the asset values if i see that 5% shrinking faster than I like.

"I actually came across the idea that investment creates savings by reading MMT, believe it or not.. so I find it a bit odd that you apparently consider this to be some sort of new insight"

I don't consider that at all.

But it's OK you learned it from MMT.

It's an important insight.

Two things:

a) its obviously not a unique MMT insight - the original Keynes is drenched in it, as is post Keynesian economics more generally, as is national income accounting logic. The correct recognition of causality is inextricably linked to understanding fallacies of composition in linking micro to macro. And you've got to understand accounting to understand that.

b) the S = binary equation is consistent with it, but the background fact of the correct causality is not the point of the expression - its about proportion and balance in considering I and (S - I) in context; Greg has a fair point on this above from the reverse direction - yes 5 per cent is a pretty significant number - and so is 95 per cent.

It's not about one or the other. It's about understanding both. That's why the equation has both I and (S-I) in it. But in order to understand private sector S you have to put them in the right context in terms of their contributions. I is a MUCH larger driver of private sector S than (S-I) is. And in fact, if you focus excessively on (S-I) then you could get the whole story backwards and start thinking that it's saving net of investment that matters most to the private sector. Anyone who thought that on January 1, 2013 and devised an investment strategy using this idea was hurt significantly by the thinking that the deficit would decline which would make us all worse off. And now we see that private sector GDP in Q3 was revised up to 4.1% largely because of private sector investment and once again the stock market is booming because of it. MMTers missed this entirely because they thought the sequester would torpedo growth in 2013. This was because they focus excessively on (G-T) and misunderstands its overall contribution.

That's the point. It's not about one or the other. And in fact, I've emphasized both in my work over the last 5 years. Especially when the debt collapse strangled private investment in 2008/9.

My comment is more directed at the idea, as I understand the idea that is, that the ratio of NFAs to total net worth is somehow demonstrative that NFA levels are insignificant AND that they represent the difference in bank created money and govt created money.

When we say that only 4 trillion out of an 80 trillion dollar "savings" in the private sector is actually NFAs I think we might be understating some things, or actually, overstating some things. The 80 trillion is the price tag on those assets, at some market price but ,any of those assets have never sold for anything close to that price tag they carry.

Its like me (or someone else rather) saying my house is worth 250,000$. The last time anyone actually spent on that house it was about 160,000$. The 250,000 is supposedly what it could get if sold today. Now the only way it could get sold for 250000 today is if someone actually has 250,000 and chooses to spend it. Much of that 80 trillion is not near what anyone has actually ever spent on that asset and if NFA levels are too low then there isn't the money available to accommodate the transaction. I can't say Ill buy someones 250000 house unless I have 250,000 or access to future flows of 250,000. NFAs play a very important part in maintaining those future flows. The flows are liquidity and NFAs are the liquid so to speak.

" if NFA levels are too low then there isn't the money available to accommodate the transaction."

That's simply not true. Most of the cash used to facilitate private sector transactions include highly liquid money market assets or private sector created instruments.

I think this is another instance of MMTers building this conceptual framework around the govt as if nothing good can happen in the private sector without govt spending.

Additionally, I would add that market values most certainly matter. First of all, you're likely paying taxes on that house at its present market value and you'll certainly pay any capital gains on it. And second, your balance sheet reflects today's market value, not your cost basis or book value. If we measured everything at book value then we'd be constructing a totally flawed version of reality. Market values might not always be "right", but they always matter. That's why Uncle Sam taxes you at market value.

Well I certainly never said nor do I believe that; " nothing good can happen in the private sector without govt spending" Thats a misreading of my view.

I simply am saying that a net of cash in peoples accounts could be and in most instances (except in Germany, China and Japan and some others) is evidence of a govt deficit or a net spending position of the currency issuer (and yes I am consolidating for this argument)

Additionally, most everyone I know, probably you too, considers a net + cash position a positive thing and actually a goal of your economic activity.

I agree about market values mattering, never said otherwise, but, especially in real estate, market values are more determined by opinions of bankers, appraisers, reals estate agents etc and not anything like the way other frequently saved assets like stocks, bonds and govt securities settle on a price. Considering that so much of monetary policy is directed THROUGH the real estate markets this leaves a lot of our portfolios values affected by the whims of these brokers/dealers in real estate. I can't begin to quantitate what that affect or difference amounts to, but when I purchase a stock as part of my savings portfolio I know the stock price is derived from many many transactions taking place on a very developed market and the opinions of many many people are being heard. In real estate its much more local and a smaller group of opinions is directing the price.

I also don't think its irrelevant that most people who purchase stocks and other savings vehicles do this without using a credit instrument. Yet most of real estate is a credit instrument which is a promise to pay over time. Of course for me to fulfill that promise I must have net cash flow thats not already promised to some other credit instrument.

What this all means I am not entirely sure, but I do think a net cash position matters to everyone and at a world macro level, isn't it true that for everyone in the world to have a net positive cash position the currency issuing entities must be in deficit?

In a world with only bank credit, where all liabilities cancel out assets would it be possible for everyone to have a net cash positive position?

So to sum up my thoughts. Plenty of good can happen without govt deficits but one thing that cannot happen (as I understand the accounting) is that everyone can be in a net positive cash position (or net positive net worth) and a positive net worth is something everyone is looking for.

"one thing that cannot happen (as I understand the accounting) is that everyone can be in a net positive cash position (or net positive net worth) and a positive net worth is something everyone is looking for."

This is precisely the point we've been trying to counter for the last two years with the equation S = I + (S-I). It is categorically false to claim the above position unless you define private sector saving as (S-I) or saving net of investment. This is not the correct definition of saving. Saving is income not consumed, not saving net of investment. In fact, to define saving in such a manner will massively distort one's understanding and I see this in your comments as well as Phil's comments above.

MMT has constructed this govt centric view of the world where the pvt sector can't save without govt NFA. But this not only ignores the relationship between financial assets and non-financial assets, but it also ignores the market value of private sector assets. In other words, you net off the shareholder's equity component of the financial asset side arriving at a zero net worth position within the private sector. This is an irrelevant perspective for all practical purposes. A much more realistic perspective of the private sector's balance sheet is to use something like the Flow of Funds which is essentially net worth = market value of financial assets + non-financial asset + NFA - liabilities. The NFA component is a rather meager portion of this overall balance sheet composition. Not meaningless, but hardly the most important piece and certainly not the "backbone" of anything as MMTers have stated.

And I don't know why you think cash can't exist without govt spending. Cash just facilitates the use of a bank account. The govt doesn't issue cash directly to users of money. It is issued via the Fed banks to accommodate the needs of bank account holders.

I hope that clarifies some....I guess we must be explaining this point terribly because it's still a confusing one for many MMTers after all this time. I think the focus on NFA and (S-I) has really caused a huge amount of confusion within MMT circles....

I'm not sure why it should be thought that (S–I)=(G–T)+(X–M) contains no more information than S=I+(S-I). Both identities say one value is the sum of two other values, but they are /different values/. This is straightforward, but for the sake of exposition, call the former T and the latter R. T states that t1 = t2 + t2, where t's are values. R states that r1 = r2 + r3, where r's are again values. Now, t1 = r3; call that net_saving. So, net_saving = t2 + t3, and r1 = r2 + net_saving. But that's as far as it goes. The rest of the values are all different and there is no way to recover R from T (since you have two equations and four unknowns).

Here's an extreme example to show why this matters. Suppose that country A undergoes some kind of calamity. As a result, a portion of its capital stock is destroyed. Yet, when you look at private net savings, you see that they were 10 percent of GDP. Is this good? You simply can't tell if private savings increased by looking at the sectoral balances alone. That 10 percent increase might be entirely made up by negative-I. To find out what it means you need to decompose net saving into saving and investment.

Very nice comment from JKH"The equation is intended to invite the question about how big I is relative to (S - I), among other things, and how that cumulates to the stock representation of each (e.g. by looking at Fed Flow of Funds accounting numbers)."

ok, the question that MMR has is that how much real savings there are relative to nominal savings. Investment is real savings. MMT assumes that during financial crises there are problem with nominal saving desires not met. There is lack of demand and plenty real savings=investments. That is why MMT is asserting the need for nominal savings because investments are doing bad because of lack of aggregate demand. Am I missing something? I don't want to insult anyone but I don't find this equation very useful either.

"Investment" is tricky because unsold inventory counts as investment, and the equation doesn't tell you whether the inventory is unsold because businesses are stockpiling in anticipation of a boom next period, or because there was a bust this period and stuff didn't sell.

MMT simply says that if everyone wants to not spend, then you won't have enough spending, and you'll get unemployment. So the Govt has to spend/tax less to fill the gap.

Investment is not tricky in this equation sense. Yes, inventory build up is investment but I don't see how this MMR equation makes a fundamental difference.

May be there are some cases when economy slows down because inventory is unsold in anticipation of a boom next period. If there are then I believe this not to be a major problem. And still I have a question, is this equation helpful in a sense that you could say: MMT is missing something very important, this is so major that we have to start our own little theory. I am not against disaggregating the compononents of some saving equation which is tautology more or less any way.

I believe both sides of this arguing to be Keynesians. That means demand side macro. Keynesians don't generally anticipate problems on supply side. May be I framed It a little wrong, that is not generally the case in their opinion. They see problems in demand side, that is why investments are going bad, that is why factories are not working at full capacity, unemployment etc. That is not to say that they don't see the need of investments in private sector but they don't worry about It, those investments will be made if there is enough aggregate demand.

May be I should not have got into this but I really don't see the significance of the above mentioned equation.